China takes another step towards flexible yuan
(Reuters)
Updated: 2006-01-04 19:54

Ma reckoned the central bank would allow the yuan to rise only slowly -- about 4 percent this year.

Even under the more restricted flexibility of the previous system, the currency never moved more than a tiny fraction of its permissible 0.3 percent each day.

Indeed, the first mid-rate quoted by the market makers, Wednesday's 8.0702 per dollar, was identical with previous close.

And the central bank was quick to dampen speculation of a further appreciation of the yuan, which the United States says is still seriously undervalued and gives Chinese goods an unfair advantage in global markets.

The central bank said it would keep the yuan stable for now.

OVER-THE-COUNTER TRADING

China revalued the yuan in July by 2.1 percent and dropped a dollar peg in favour of managing its value with reference to a basket of currencies.

The yuan has consistently trended higher since then, but in minuscule steps, gaining just 0.5 percent since revaluation.

"The (mid) rate will be near the yuan's previous day's close for now as market markers will be cautious and take hints from the central bank," said a dealer at a major Chinese bank.

"But it will drift away gradually to become a more independent rate along with the deepening of currency reforms."

Other changes launched on Wednesday supported the introduction of market makers -- banks who stand ready to trade when no one else wants to, keeping the market liquid.

Market participants would be allowed to trade openly over the counter, as is usual in foreign exchange markets elsewhere. The old system, which the central bank said would eventually be scrapped, automatically matches trades for anonymous bidders.

The 0.3 percent daily range applies to the dollar mid rate. The yuan is allowed to move further against other currencies.

The China Foreign Exchange Trade System will announce the daily mid rates against the U.S. dollar, euro, Japanese yen and Hong Kong dollar at 9.15 a.m. daily.