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China gives currency more freedom with new reform

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China took a milestone step in turning the yuan into a global currency on Saturday by doubling the size of its trading band against the dollar, pushing through a crucial reform that further liberalizes its nascent financial markets. The People’s Bank of China said it would allow the yuan to rise or fall 1 percent from a mid-point every day, effective today, compared with its previous 0.5 percent limit.

The timing of the move underlines Beijing’s belief that the yuan is near its equilibrium level, and that China’s economy, although cooling, is sturdy enough to handle important, long-promised, structural reforms…

A slowing world economy that has pared investor expectations of a steadily rising yuan likely also gave Beijing the confidence to proceed, knowing that a larger band would not necessarily lead to a stronger currency.

“The central bank chose a good time window to enlarge the trading band. The market’s expectation for a stronger yuan is weakening,” said Dong Xian’an, chief economist at Peking First Advisory in Beijing. “The move partially clears away doubts on whether China can manage a soft landing in its economy, and makes clear China’s reform road map.”

Investors have widely expected China to widen the yuan’s trading band this year, thanks to repeated hints from Beijing that the change would take China one step closer to its financial goal: a basically convertible yuan by 2015.

Having a currency that trades with fewer restrictions also enhances Shanghai’s status as a financial center. China envisions turning the city into a global banking hub by 2020…

Ultimately, the government wants the yuan to rival the dollar as a global reserve currency, and to this end it has gradually allowed the currency to trade more freely.

I’ve watched hour-by-hour discussion of this change over the weekend. The discussion only becomes more interesting as the markets opened Monday morning in Asia a full 24 hours before the United States.

Most analysts – as the article notes – have seen this coming for several months. Regardless of the political claptrap from Obama or Romney. Conservative financial sources like those who gravitate to and around CNBC had started discussion early last week on the how-and-when of Chinese banks issuing bonds rather than relying exclusively on China’s central bank. And The City of London already announced days ago they plan to begin trading actively in the RMB as soon as practical.

Watch Bloomberg TV sometime, folks. Especially Surveillance Midday with Tom Keene – or listen to the companion radio show in the morning. You can stream these from Bloomberg.com’s several websites, from iTunes, on your computer or iPhone or iPad. Better news shows than the crap sold as media and entertainment, anyway.

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Written by Ed Campbell

April 16, 2012 at 6:00 am

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