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China doubles yuan trading band, seen as sign of confidence

The change is effective from Monday.

London |
March 17, 2014 3:19:47 am

China’s central bank loosened its grip on the yuan on Saturday by doubling the daily trading range for the currency, adding teeth to a promise it would allow market forces to play a greater role in the economy and its markets.

Analysts said the move was a sign of confidence that the central bank had successfully fought off a plague of currency speculators, and at the same time signalled that regulators believe the economy is stable enough to handle more promised reforms going forward.

But as far as Beijing’s project to encourage the international usage of the yuan is concerned, there is less consensus, with some warning that more volatility could discourage firms from using the yuan in the short run.

The People’s Bank of China (PBOC) said the exchange rate will be allowed to rise or fall 2 per cent from a daily midpoint rate it sets each morning. The change is effective from Monday.

“This is a major step towards building more market-oriented exchange rate mechanisms in China, signifying a gradual withdrawal by the central bank from regular intervention in the foreign exchange market,” said Fu Qing, head of foreign exchange trading at Standard Chartered Bank in Shanghai.

“However, with more volatility in the yuan’s exchange rate created by the reform, Chinese companies will face an uphill task learning how to hedge their currency risks.” Many market participants have long viewed the yuan as a one-way appreciation bet. Authorities are trying to change that by demonstrating that it is now more of a genuine market that can go up and down like any other.

“The People’s Bank of China will continue to increase the two-way flexibility of the renminbi exchange rate, keeping the exchange rate fundamentally stable within reasonable and balanced levels,” the PBOC said in a statement on its website.

A PBOC spokesman in a separate statement said that the new flexibility would help improve efficiency and increase the decisive role of the market to allocate resources.

The widening of the band had been broadly expected after the yuan fell in value from mid February through early March. Traders suspected that the central bank, working through state banks, pushed the currency down to try to force those speculating on appreciation to unwind their positions.
The idea was to leave the market more balanced between buyers and sellers to reduce the chances of dramatic moves once the trading band was widened.

The central bank’s clamp down came after it had guided the yuan to rise 2.9 per cent against the dollar in 2013, far outperforming other emerging economy currencies and surprising markets, which had not been so bullish.

That rally encouraged capital to flow betting on a steady increase in Chinese interest rates, which made Chinese assets relatively attractive given the weakness of the dollar.

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