Banks now Allowed to Create Their Own Exchange Rates
China has now allowed several banks to freely set up their own exchange rates for the Chinese yuan against the U.S. dollar using over the counter transactions when they are dealing with retail customers. Which some say is another way of freeing the exchange rate from the control of the government. Before banks were required to price the yuan and dollar rate that they offer to retail clients with 3 percent in either direction of the central bank midpoint that made on a given day.
Although the new rules doesn’t apply to the yuan dollar main rate in the interbanking market, that is subjected to controls including the central bank’s creating a daily midpoint in which the spot rate is allowed to fluctuate in either direction by 2 percent. Base on the new policy which was effective immediately, banks can price their own over the counter yuan and dollar exchanges rates if it’s in line with market supply and demand and if there are no restrictions.
But the wholesale market that the banks trade in still needs to abide with the midpoint guidance rate, since its primary market is the largest source of foreign exchange supply and demand. This market has posted US$ 15 billion in transaction everyday and continues to show a strong influence on the retail market. That move is also marked as an important an symbolic gesture that affects small customers usually individuals since large customers trading prices are decided by market rates.