Friday, December 05, 2008

Market halt may prompt China FX reforms

Along with the China's foreign exchange market's frozen this week, the task of the central bank to manage a slow depreciation of the yuan getting tougher and tougher, which may lead to the reforms to the tightly controlled currency system, analysts said.

One reform that might help revive the market would be a widening of the trading band, currently set for dollar/yuan at 0.5 percent either side of a daily mid-point set by the central bank, reported Reuters.

The central bank finally let yuan drop to a five-month low after the great effort to keep it steady against to dollar for four months.

In the onshore spot market, trade has almost ground to a halt as most banks, expecting the yuan to fall against the dollar in coming months, have refused to sell dollars at rates within the permitted daily trading band.

That has left the central bank almost the sole supplier of dollars to the market, traders said. If it wants to revive the market any time soon, rules and restrictions on trade may have to be loosened.

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