China’s unexpected move to allow the yuan to trade more freely is a step the right direction, but additional measures need to be taken, according to the International Monetary Fund.
The policy change is “a welcome step” that should allow market forces to play a greater role in the yuan’s development, the IMF said in a statement.
“Greater exchange rate flexibility is important for China as it strives to give market forces a decisive role in the economy and is rapidly integrating into global financial markets,” the IMF said.
China’s central bank generally sets a daily midpoint for the yuan, around which the currency can move up and down within 2%. But on Tuesday, the People’s Bank of China surprised markets by announcing that going forward, the midpoint will be based on the previous day’s closing price.
The world’s second-largest economy has historically tightly controlled its currency, which has helped boost trade and spur growth. But over time, the government has loosened its grip a bit — for example, last year, it doubled the allowable trading band for the yuan.