Daily trading band of the yuan advised to expand

China should widen the daily trading band of the yuan against the dollar to 0.75 percent and further boost two-way movements in the currency's exchange rate, an adviser to the country's central bank said on Tuesday.

"The central bank should widen the yuan's daily trading band step by step. As for the next step, it could expand it to 0.7 or 0.75 percent from the current 0.5 percent," Li Daokui, an academic advisor to the People's Bank of China, said on the sidelines of the ongoing annual session of the NPC.

"The yuan exchange rate is now close to an equilibrium level as evidenced by the shrinking trade surplus. We should further increase the two-way flexibility of the yuan exchange rate," said Li.

Li's remarks echoed comments made by the central bank governor Zhou Xiaochuan on Monday.

"The yuan exchange rate has gradually met the requirements for greater flotation. The central bank is looking at the possibility of increasing the yuan's daily floating band," Zhou was quoted by the Xinhua News Agency as saying.

The central bank announces a central parity rate for the yuan against US dollar on every trading day and allows the yuan to rise or fall by 0.5 percent from the rate in the onshore market.

It last expanded the yuan's trading band against the dollar from 0.3 percent to 0.5 percent in May 2007.

The yuan weakened further to 6.3141 against the dollar yesterday following a sharp fall of 141 basis points Monday, which development analysts said signaled the possibility of a wider floating range.

"A wider floating band would provide an easier route for the yuan to rise or fall against the dollar more flexibly," Zheng Jianmin, a business professor at University of International Business and Economics, told the Global Times.

"With the interest rates highly controlled in the country, the role of a more flexible exchange rate in economic restructuring is greater," he said.

Tan Yaling, head of the China Forex Investment Research Institute, told the Global Times that, with the current narrow floating band, any big movement in the rate can easily create panic on the market, and an expansion to even 1 percent floating band is acceptable.

"By widening the band, we could reduce currency speculation and hedging," she said.

Chinese Premier Wen Jiabao said in his government work report Monday that China will improve the mechanism for setting the yuan exchange rate.