Mainland banks set their own exchange rates for the yuan against the US dollar for the first time yesterday in deals with retail clients, following the latest steps by the People's Bank of China to relax strict currency controls.
The new rules, posted on the State Administration of Foreign Exchange's website late on Wednesday, come days ahead of the start of annual strategic and economic dialogue talks with the United States, which will take place in Beijing this year.
US Treasury Secretary Jack Lew said earlier this week that the yuan's value remained a "very big issue" for Washington.
Analysts told the South China Morning Post that the impact of the latest relaxation on the exchange rate would be limited, but it was a key signal for further financial liberalisation.
Before the change in policy - which comes just months after the doubling, to 2 per cent, of the size of the daily band in which the yuan trades against the dollar - the central bank set the rate at which all yuan traded against the dollar. It will continue to do that for the bulk of the deals in the two currencies, much of which supports trade and investment.
Daily rates for retail banking clients could experience some fluctuation as banks start to set their own rates.
"This could lead to more volatility. At least for retail exchange, the marketplace will be more agitated." Howhow Zhang, the head of research at Shanghai-based consulting firm Z-Ben Advisors, said, adding that daily and annual quotas on the value of yuan exchange would continue to be a drag on retail deals for bank customers.
Exchange rates on retail deals will still be guided by interbank market rates, which are subject to controls such as the midpoint trading rate set each day by the central bank.
Regulators have shown little intention thus far of letting the market determine the midpoint rate, the key to control over exchange rates.
The mainland previously lifted retail yuan exchange controls involving currencies other than the dollar.
Yesterday's move also shows that regulators have been somewhat successful in fighting the inward flow of speculative cash that has warped export figures for years.
"This also continues to suggest that the authorities onshore have become much happier with the nature of flows, following the reversal in one-way hot money inflows seen in recent months," HSBC said in a note to clients.
It comes on the heels of a series of piecemeal reforms that are pushing banks to compete more actively for foreign currency deposits.
Last week, the central bank removed the cap on deposit rates for foreign currency accounts in Shanghai, allowing banks to set the rate according to market terms.