The People’s Bank of China decided to lose its hold on the yuan. Now the yuan’s daily trading band is widened from 1 to 2 percent. The regulator’s decision gives teeth to more transparent currency system and more flexible exchange rate. However, these changes were not unexpected for the market observers. The Chinese government has already warned about the upcoming financial reforms in the middle of the last year. In this case they walk the talk. The first steps have been already made – early this year China allowed its first-ever corporate default. Besides, the PBC could not but leave the local currency and started to weaken it actively. And now the regulator touted a goal of more flexible yuan. Doing so, the central bank confirms that the economy is rebounding and ready for such endeavors. Of course, some analysts do not share such optimistic view and others believe that a significant increase in volumes of the Chinese currency used worldwide is a remote goal. At least, looser exchange rate of the yuan will hardly promote any changes. As for technical standpoint, now the Chinese companies will have to master currency risks hedging.
To recall, since January 2014, the yuan lost about 1.6% against the U.S. dollar due to lower GDP growth. That triggered a massive capital outflow. The currencies were also pressured by the corporate defaults and sharp fall in copper prices (the metal is used as collateral for the loans). To support exporters, the Chinese government has deliberately weakened the national currency rate.
