The widening of the trading band to 2.00% could represent another step in China’s gradual and pragmatic approach to a “free-floating” Chinese yuan. When Chinese policy makers announced that the band would be widened to 1.00% in April 2012, many investors assumed that policy makers would tolerate the potential for increased volatility in the Chinese exchange rate. Should this reform occur, the 2.00% trading band could be similar to other “managed-float” currencies in Asia. Ultimately, both policies appear consistent with the government’s stated policy goals of reducing risk in the financial system and creating a development glide path to a more broadly accessible Chinese yuan that also promotes its wider use for international trade.
So far in 2013, the Chinese yuan has been one of the best-performing emerging market currencies against the U.S. dollar. Continued policy reforms may create a situation where short-term pain (via slower economic growth) ultimately leads to a more efficient and healthy economy in the long run.
WisdomTree Dreyfus Chinese Yuan Fund (NYSEArca: CYB)
Rick Harper is head of fixed income and currency for WisdomTree Asset Management. This post was republished with permission from the WisdomTree blog.
1Source: http://news.xinhuanet.com/english/china/2013-07/20/c_132557311.htm
2Source: http://www.bloomberg.com/news/2013-07-23/li-s-government-sees-7-as-growth-bottom-line-chinese-media-say.html