CHINA-ECONOMY: BANKING
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In an important decision indicating a further move towards RMB convertibility, a Reuters report of July 3, stated that China has permitted banks to freely set their own exchange rates for the renminbi against the dollar in over-the-counter transactions, describing it as another step toward freeing the exchange rate from government control. Banks were previously required to price the exchange rate that they offered clients within 3 percent in either direction of the Chinese central bank’s midpoint on a given day. The new rules do not apply to the currency’s main rate in the interbank market, which is subject to controls including the central bank’s setting a daily midpoint from which the spot rate has been allowed to fluctuate in either direction by 2 percent since March. Under the new policy, effective immediately, banks can price over-the-counter exchange rates “in line with market supply and demand and without any restrictions”, the People’s Bank of China said in a statement published late on Wednesday. The move “is aimed at further perfecting the mechanisms to establish market-oriented exchange rate for the yuan,” the central bank added.
But the wholesale market that the banks trade in must still abide by the midpoint guidance rate. Because that primary market is an enormous source of currency supply and demand, posting around $15 billion in transactions every day, it will continue to exercise a strong influence on the consumer market. |