China's central bank decided April 14 to widen the Chinese yuan's trading band against the U.S. dollar from 0.5 percent to 1 percent. It is seen as a crucial step toward a free floating exchange rate that can help Beijing achieve at least three strategic goals.
First, the action temporarily stops the accusation of currency manipulation against China. The U.S. Treasury Department, for example, believes it is favorable to the economy of China, the United States and even the whole world.
When the exchange rate of the yuan is no longer the target of international criticism, it could decrease bickering between countries and promote international economic cooperation.
Second, by moderately increasing the fluctuation of the yuan, the measure will ease the pressure on Beijing to allow its currency to appreciate. This in turn could help maintain the equilibrium of the yuan and lessen the downside pressure on China's economy, which is at risk of a "hard landing."
More importantly, it marks a major step forward in internationalizing the yuan, so that the currency can be considered a payment tool and even a unit of account by foreigners. (Editorial abstract -- April 17, 2012)
(By Y.F. Low)