Turbulence in Chinese financial markets, reflecting growing worries about investing in the country’s assets, could slow the yuan’s rapid emergence as a major international currency.
Over the past five years, the yuan has gone from being a thinly traded currency to a major one for trade settlement, retail and institutional investment and arbitrage activity. A host of financial and commodity linked derivatives are tied to it.
Analysts said two changes this year in Chinese policy have highlighted risks that could slow down the yuan’s march towards internationalization: the widening of the yuan’s daily trading band and a toughening of Beijing’s attitude towards defaults.
The People’s Bank of China (PBOC), the central bank, this month doubled the daily permitted trading band for the yuan to 2 percent from 1 percent either side of a reference rate. It also pushed the currency lower in a bid to shake hot money out of the market to make clear the yuan is no longer a one-way upward bet.
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