China Center Quick Note: RMB band-widening -- Short-term volatility, long-term vulnerability

Last month, the Chinese central bank announced a widening of the daily trading band
for the USD-CNY exchange rate, doubling the allowed movement to +/-2 percent around the daily fixing rate from +/-1 percent previously. While the larger RMB trading corridor has and will continue to influence short-term movements in financial markets, the implications for the wider macro-economy and for MNC business planning assumptions are not so significant in the near term. This policy development does warrant attention, however, vis-à-vis its place in the broader reform agenda, and this note outlines its likely ramifications within that context.