China to Allow Yuan to be Traded Freely by 2020
China announced that they would be allowing the tightly managed yuan to be traded freely by 2020, thus easing up trade tensions with the US and other nations. Chinese leaders agreed to make the yuan a freely tradable and usable currency by the end of the latest long range development plan in 2020 and China has been gradually expanding the use of the yuan abroad for trade, but is restricting the daily movement of its exchange rate the money flow in and out of China.
Chinese leaders said that for years that they would eventually allow the yuan currency to be freely traded, but will require extensive reforms to the State run financial system that make banks and other financial entities capable of coping with fast changes in interest rates and financial flows. The announcement came in time as analysts stated that market forces are placing downward pressure on the yuan, meaning a loosening of controls will cause the currency to weaken and make the decision acceptable domestically as prices of Chinese exports are reduced and assist exporters that are struggling with the weak global demand.
Also China is planning to switch to a negative list in regulating foreign exchange, allowing companies to do whatever actions that are not prohibited instead of what regulators says. It will also promote the yuan’s addition to the basket of currencies that is used by the International Monetary Fund in determining the value of its in house currency that is also known as the Special Drawing Rights.
Last August, China rattling the global market with a surprise change in the exchange rate and made the yuan more market oriented resulting in the yuan falling 2 percent and prompted suggestions that the Chinese was devaluing the yuan to help struggling Chinese exporters. The yuan’s value is being set everyday in the basket of currencies and is believed to be dominated by US dollar, meaning that the yuan increased as the dollar jumped in the past year and giving China an incentive to allow more flexibility.