May 18, 2007 / 11:38 AM / 11 years ago

FACTBOX-How China's currency regime works

May 18 (Reuters) - China’s central bank said on Friday that it would widen the yuan’s daily trading band to 0.5 percent, from 0.3 percent, effective Monday. Here are some of the main features of China’s foreign exchange regime.

-- China revalued the yuan CNY=CFXS, or renminbi, by 2.1 percent against the dollar on July 21, 2005. At the same time it abandoned a decade-old dollar peg in favour of "a managed floating exchange rate based on market supply and demand with reference to a basket of currencies".

-- Under this system, the yuan had been allowed to rise or fall by 0.3 percent a day against the dollar from an opening midpoint set by the central bank at 9.15 a.m. based on quotes collected from market makers.

-- The yuan’s daily trading range against other major currencies is plus or minus 3 percent. An initial band of plus or minus 1.5 percent proved to be impracticable because it clashed with the yuan’s limits against the dollar. Friday’s announcement left that band unchanged.

-- On most days the yuan ranges less than 0.15 percent from its dollar midpoint. The biggest move was a 0.28 percent fall on Aug. 15, 2006.

-- People’s Bank of China Governor Zhou Xiaochuan has said the dollar, euro, yen and Korean won are the main currencies in the reference basket. Others include the Singapore dollar, sterling, the Malaysian ringgit, Russian rouble, Australian dollar, Thai baht and Canadian dollar.

-- The weightings are secret but the central bank chief has said the dollar accounts for much less than half of the basket.

-- Zhou said in Singapore last September that the PBOC would gradually refer less to the basket and let market forces play a greater role in determining the yuan’s rate.

-- Exactly how the PBOC uses the basket to steer the currency is a mystery. Some currency strategists have a good track record, some of the time, of predicting the yuan’s opening midpoint based on movements in the constituents of the basket since the previous day’s close. But at other times the relationship breaks down, underlining the huge discretion the PBOC has in managing the rate.

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