Trading Band and China

China: China has been signalling for years that it is gradually moving toward a more open and normal economy, which includes moves allowing the yuan to float freely in the market just like other major currencies. But its been a program of baby steps. In 2005, China allowed the yuan to begin trading in currency markets, initially permitting a maximum swing in value of just 0.3 per cent daily. The daily trading band was widened to 0.5 per cent in 2007 and 1 per cent last year. And as of Monday, the daily limit is now 2 per cent, according to Globe and Mail. The yuan fell this week following the announcement, because traders fear that the Chinese economy is slowing. But in the longer run, the currency is likely to gradually rise as Chinas economy grows and markets fully value the yuan. Thats what Chinas trading partners want; they see the Chinese economy as overly dependent on exports. Chinese consumers with higher-valued yuan in their pockets will have higher living standards, will spend more, and will be able to afford to buy more goods from abroad, at higher prices which will lead to higher living standards in Chinas trading partners, including Canada and The Chinese governments announcement that the yuan will be allowed to trade within a wider band starting this week is a major step toward creating a more modern Chinese economy. The latest increase in the trading band is the most significant yet. With 2 per cent worth of daily leeway, the yuan will rarely bump up against its trading limits, given historical levels of volatility, which means the currency should largely trade as the market demands. No one expects the Peoples Bank of China to take an entirely hands-off approach, but its range of policy options to manipulate the currency diminishes with each expansion of the trading band. (www.immigrantscanada.com). As reported in the news.