China expands yuan trading band to fast-track convertibility

China is steadily expanding the trading band of its currency, the yuan, in a bid to speed up capital account convertibility in an orderly way, China's central bank, the People's Bank of China said on Wednesday.

"We will gradually perfect the renminbi (yuan) formation mechanism and expand the exchange rate's floating range in an orderly manner," the Chinese central bank said in a statement published on its website.

The People's Bank also said it would steadily expand cross-border yuan usage.

The Chinese government is in active discussions with the British government about setting up a clearing bank in London, creating a platform for yuan trade business in Europe.

Hong Kong is already the leading offshore yuan hub after the establishment of Bank of China (Hong Kong) as a clearing bank and the Chinese authorities are pressing ahead with setting up one in the city of London.

At present more than 80 per cent of yuan trade settlement transactions are handled in Hong Kong, with  Singapore and Taiwan being other centres. All these offshore centres have Chinese banks as trade clearing institutions - Singapore has Industrial and Commercial Bank of China (ICBC) and Taiwan, Bank of China, as clearing institutions.

"The UK and Chinese governments are in active discussions now about the appointment of a RMB clearing bank in London, recognising London's role as the western centre of offshore RMB trading," Britain's chancellor George Osborne said while speaking at the British Chamber of Commerce Hong Kong.

Central bank head Zhou Xiaochuan had said in November that the People's bank would "basically" exit from regular intervention on the currency market after steadily liberalising financial markets and allowing the yuan to trade more freely.

The central bank last allowed the yuan's trading band to widen in April 2012 allowing the exchange rate to move 1 per cent either side of the midpoint fixing daily.

The yuan's slow but steady appreciation against the dollar has attracted inflows to yuan-denominated assets in China and offshore centres such as Hong Kong, Singapore and London. The currency rose 3 per cent last year and traders see similar gains in 2014.

The yuan has been on track to become the third-largest trade settlement currency by 2015, and HSBC expects the yuan to become fully convertible within five years.