Beijing's decision to widen the daily trading band of the yuan against the US dollar - the first adjustment in nearly five years - paves the way for a freely convertible currency and more fireworks in the nation's financial reform, according to economists.
Starting from today, the yuan is allowed to rise or fall within 1 per cent of the trading band, against the 0.5 per cent range previously, the People's Bank of China said on Saturday.
Some economists said they had expected the band to be widened to just 0.7 per cent, but pointed out that the wider the trading range, the higher the risks. Once the currency trades beyond the trading band, the central bank will intervene.
Dai Xianglong, chairman of the National Social Security Fund, said at the Boao Forum in Hainan two weeks ago that the central government preferred market forces to drive yuan reform, and that now the time was ripe to push forward and make it an international currency for investments, reserve and trade settlement.
HSBC chief economist Qu Hongbin anticipated more 'fireworks' in liberalising the mainland's current account by globalising the yuan, liberalising domestic bond markets, and breaking the monopolies of the banking sector. He said the mainland's shrinking trade surplus, which accounted for about 2 per cent of gross domestic product last year compared with the peak of 7.5 per cent in 2007, provided favourable conditions to relax restrictions on capital inflows.
Daiwa Capital Markets chief economist Sun Mingchun said widening the range was part of a wave of initiatives the central government has unveiled since the national financial working group met in January, a once-every-five-years meeting that sets the agenda for financial reform.