• PBOC Releases New Rules on RMB Exchange Rate
  • April 19, 2012
  • Law Firm: Norton Rose Canada LLP - Montreal Office
  • On 14 April 2012, the People’s Bank of China (PBOC) released a notice (PBOC Notice) on its website announcing that, with effect from 16 April 2012, the exchange rate of RMB to US Dollars in the inter-bank foreign exchange spot market (the Exchange Rate) may float in the range of 1 percent above or below the central parity rate issued daily by the China Foreign Exchange Trade System (the Benchmark Rate). Before this announcement the Exchange Rate was only permitted to float in the range of 0.5 percent above and below the Benchmark Rate.

    As background:

    • In July 2005, PBOC abolished its previous policy of pegging the RMB to the US Dollar. Since then, the RMB exchange rate has been allowed to float in a narrow margin around a fixed base rate as determined with reference to a basket of world currencies. As regards the US Dollar, the RMB/US Exchange Rate was permitted to float in the range of 0.3 percent above or below the Benchmark Rate as issued by PBOC.
    • From May 2007, PBOC looked to expand the fluctuation range from 0.3 percent to 0.5 percent so as to increase the flexibility of the RMB exchange rate. However, this process was suspended from mid-2008 to June 2010 because of the impact of the global financial crisis.
    • On 19 June 2010, with the approval of the State Council, PBOC decided to resume the RMB exchange rate policy suspended in 2008, and again allowed the Exchange Rate to float in the range of 0.5 percent. This served to liberalise once again the exchange rate of RMB.

    The further expansion of the floating range of the Exchange Rate from 0.5 percent to 1 percent under the PBOC Notice represents a positive step forward towards the internationalisation of the RMB. PBOC also committed in the PBOC Notice to maintaining the continued “reasonable” fluctuation of the RMB exchange rate with reference to domestic and international financial conditions, market supply and demand, and the rate of fluctuation in the basket of world currencies the aim being to ensure the stability of the RMB exchange rate on a “reasonable and balanced” basis.