A move to widen the yuan’s trading band is Beijing’s latest step towards financial liberalization but analysts warn that it may trigger renewed volatility and further damage market sentiment.
In a document released late Friday, China’s State Council announced its intention to widen the currency trading band to 3 percent against the dollar, from 2 percent currently. That means the tightly controlled yuan—also known as the renminbi—will be allowed to rise or fall 3 percent from a daily midpoint rate set by the People’s Bank of China (PBoC) every morning.
“The data in China has been weak so if they widen the trading band now, there will be more depreciation pressure and volatility pressure,” Johanna Chua, head of Asia economics and market analysis at Citi, told CNBC on Monday, pointing to a report last week showing June factory activity slumping to a 15-month low.
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