The People’s Bank of China has announced that is will allow more flexibility in both ways for Chinese yuan exchange rate. From 16 April (Monday) onwards, the trading band limit for USDCNY will be increased from ±0.5% away from the daily fixing to ±1% away from the daily fixing.
Increasing flexibility of the exchange has been mentioned for a while from Chinese officials, thus this announcement is probably not a surprise, nor it is a huge move that mark any dramatic change in exchange rate policy, in my view. I believe that the Chinese yuan is no longer hugely undervalued, and that with a slowing economy, there is no reason to allow any rapid appreciation (and indeed, I expect depreciation if the economy slows too much).
Keep in mind that since the economy is slowing rather more than most expected, we have already seen the exchange for Chinese yuan appreciating at a much slower pace, if it is still appreciating at all. Indeed, the yuan has depreciated very slightly in the first quarter of 2012:
