Earlier in November the head of the People’s Bank of China said that the country will steadily make the yuan more flexible and market-driven by expanding its trading band. The Chinese Central Bank plans to gradually exit from its regular intervention in the foreign exchange market.
This announcement meant good news for traders who have been unable to penetrate the market in the past. The comment followed on from reform discussions the previous week that hopes to let the market play a more decisive role in China’s economy. The reform included a new free trade zone in Shanghai that offers free convertibility of the yuan. This allows for greater use of the currency, and may attract traders and investors.
While the complete liberalisation of the yuan may take up to five years, the comment by the People’s Bank of China still affected trade, as it spurred increased dollar selling because of the yuan’s potential strengthening against the dollar. Up until now, the dollar has enjoyed relative freedom as the world’s default currency, but with the introduction of the yuan into the mix, the hegemony of the dollar is under threat. Andrew Speakman, Market Analyst at Hantec Markets said, ‘It’s clear that the loosening of capital controls will be by no means rapid, but there is little doubt that the move towards convertibility will boost the yuan’s appeal. Given the U.S. dollars current dominance as the world’s funding currency, these changes have the potential to really rock the boat.’
With deals all over the world, China is looking to increase the role of the yuan in global markets, and thus its influence in the world economy. Some are saying that China’s changing attitude will have the biggest effect in global currency since the introduction of the Euro.
While this shift may be years in the making, the yuan’s introduction into the global economy may spell large changes for forex trade in the coming years.
Guest post by Andrew Speakman of Hantec Markets