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People's Daily Online>>China Business

RMB exchange rate reforms take a giant step

By Shi Jianxun (People's Daily Overseas Edition)

08:09, April 19, 2012

Edited and translated by People's Daily Online

According to the announcement of the People’s Bank of China made on April 14, the central bank will expand the floating range of trading price of RMB against U.S. dollar in the inter-bank spot foreign exchange market from 0.5 percent to 1 percent since April 16. The margin between the maximum selling rate and minimum buying rate in spot exchange of U.S. dollar that the bank designated to handle foreign exchange (DBU) offers is allowed to fluctuate by 2 percent other than original 1 percent as taking current reference rate as benchmark.

This is another expansion of daily exchange margin of RMB against U.S. dollar since 2007 when the margin was enlarged to 0.5 percent from the original 0.3 percent. This important reform regarding to making the exchange rate more flexible, is in line with current domestic and international financial and economic operating conditions, and is a major strategic initiative for pushing forward the market-oriented reforms of RMB exchange rate as well as the process of RMB internationalization.

Relaxation of RMB exchange rate band may generate all-round positive effects

First, it is conducive to further promote the RMB to return to a balanced rate of exchange. Since the exchange rate reforms, the reference rate of RMB against U.S. dollar has appreciated by more than 30 percent, basically on balanced status. It is appropriate time to introduce the reform under current conditions that China’s foreign exchange market is increasingly mature, participants’ ability in independent pricing and risk management becomes higher, and the changes in RMB exchange rate is expected to begin to differentiate.

Second, it is conducive to promote RMB exchange rate marketization, facilitate price discovery of the RMB exchange rate, and improve the construction of the floating exchange rate system which is expected to be based on market supply and demand and be regulated and controlled with reference to a basket of currencies, for the ultimate realization of RMB exchange rate’s free floating.

Third, it is in favor of promoting the process of RMB internationalization. An effective, flexible and market-oriented RMB exchange rate formation mechanism is the precondition for the RMB internationalization and capital account liberalization. According to international experience, capital account liberalization will lead to very intense capital flows, which easily cause great financial risks, in the

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