China closer to free float for renminbi

Tim Wallace
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CHINA will today take a major step towards integrating its currency into the world economy, allowing the renminbi to fluctuate more directly in line with supply and demand.

From today, the renminbi is free to move up or down by up to one per cent per day – double the 0.5 per cent band formerly allowed.

Previously, the country has been accused of deliberately holding down the value of its currency to artificially give its exporters a competitive boost against rivals in other nations.

When a country has high exports and a large trade surplus, market pressures should strengthen its currency, and the one per cent band will allow this to happen more rapidly.

The currency has risen gradually, appreciating by around 30 per cent against the dollar in the last seven years.

However, by waiting until the economy slowed down, China may have avoided a sudden appreciation – demand for the renminbi is slackening, reducing pressure for an abrupt strengthening.

International Monetary Fund boss Christine Lagarde welcomed the change of policy, saying “this underlines China’s commitment to rebalance its economy toward domestic consumption and allows market forces to play a greater role in determining the level of the exchange rate”.

Official Chinese news agency Xinhua noted: “The move could also help China deflect criticism of its currency policy ahead of the annual spring meeting of the IMF in Washington next week.”