China's central bank said Saturday it would allow the yuan to trade in a wider range against the dollar, which is considered an important step in liberalizing its exchange rate.
The new rule will come into effect Monday, allowing the currency to fluctuate by as much as 1.0 percent on either side, according to the central bank. Currently the limit is 0.5 percent.
At the same time, in spite of many earlier promises to diminish the control on the currency and to move closer to full convertibility, it has done little in this matter to satisfy the U.S. China's exchange-rate policy is a major concern in terms of its trade relations with the U.S.
Although the U.S. has attempted to change the existing dynamics by asking China to strengthen the yuan against the dollar, China is aware that the cost of Chinese labor would rise relative to that of the U.S. in the global marketplace.
The U.S. has received support from other countries regarding its stance on China. They include Japan, where the cost of labor is becoming a critical concern.
China's international influence is growing, and its momentum will continue for some time. This comes at the expense of the U.S. and Europe, but neither geopolitical entity has the means to reverse it.
The U.S. is relying on China for its treasury distribution and trade, and Europe is depending on China for trade and future funding needs. China is making prudent investment decisions in Europe and the U.S.
The central bank's latest move will be taken with a pinch of caution by the U.S. and rest of the world. China's foreign-exchange reserve data for the first quarter released Thursday indicated the total value of its reserves rose from $3.18 trillion to $3.31 trillion.
The volume of foreign exchange accumulated by the People's Bank is affected by how firms in China manage their foreign-exchange receipts and by cross-border flows arbitraging between the onshore and offshore renminbi markets, said Capital Economics.
The fact that China is still intervening in the foreign-exchange market in a big way is a reminder that it remains reluctant to allow the yuan's value to be determined fully by the market.