The change that entered into force on Monday (Apr. 16) concerns the maximum allowed fluctuation in the yuan’s interbank spot foreign exchange rate during a given business day. While the move has little impact for the general public, it is considered to be an important step towards freer yuan convertibility. Currently, it is expected that People's Bank of China will move to free convertibility of the yuan by 2015.
After a one-and-a-half-year episode of yuan appreciation against the dollar, the yuan-dollar rate has held quite steady over the past four months. Both the official Shanghai yuan-dollar rate and the Hong Kong off-shore rate have stabilised around the 6.3 level. Moreover, expectations of yuan appreciation in the forex markets appear to have evaporated; 12-month yuan futures rates are no different from the current exchange rate level.
According to media reports, the central bank sees the current yuan-dollar exchange rate at or near equilibrium. One piece of evidence cited is that the trade balance overall was near perfect balance in the first quarter of 2012. On the other hand, it is typical for China to post its weakest trade balance figures for the year in the first quarter, which always embraces the Chinese New Year holidays. Growth in China’s foreign currency reserves slowed in January-March, even if the PBoC appeared to be purchasing foreign currencies on the market to prevent yuan appreciation. Should the trade surplus start to increase rapidly in the current quarter and growth in the foreign currency reserves accelerates, the debate about the yuan exchange rate will no doubt resurface again.
Yuan-dollar exchange rate, Shanghai and Hong Kong