For years, investors had viewed the continued strengthening of the Chinese currency as a very safe bet. Indeed, it’s gained about 9% since the middle of 2010.
But the days of steady, constrained appreciation are now over.
The yuan has been allowed to move within a wider band this week, following a decision by China’s central bank to double the trading range for the yuan to 2% in either direction of a rate set daily by the government. The new policy lets the yuan, also called the renminbi, move up and down in value more than it had before.
Experts have applauded the central bank’s move as a necessary step for the government to achieve financial reforms.
The Chinese government has historically maintained a tight grip on the yuan. Doing so has allowed Beijing to curb money flows in and out of the country, and favorable exchange rates have helped to boost exports and manufacturing.
Just this week, mining giant Metalloinvest said it had arranged an export financing facility worth $1.15 billion with a group of banks including the three biggest names in France, Deutsche Bank, UniCredit of Italy, ING of the Netherlands, as well as Credit Suisse and Japan’s Bank of Tokyo Mitsubishi.
Metalloinvest is controlled by Alisher Usmanov, who is reported to be Russia’s richest man and close to Putin.
Some investors were caught off guard by the bank’s decision to introduce depreciation and allow more volatility.