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Wider yuan trading band shows desire for reform
By Yao Wei |
April 18, 2012, Wednesday
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Print Edition
Print Edition
WE all knew it was going to happen, and any moment it seemed likely. On a peaceful Saturday morning, it finally happened - China decided to double the yuan's daily trading band against the US dollar to 1 percent from 0.5 percent, effective from this week. This is a small step but a big gesture of China's commitment to liberalize its exchange rate.
After the band widening, there is all the more reason to expect some small depreciation against the US dollar in the short term, given our expectation for further deceleration in China's economic growth and the risk-off global backdrop. However, we still see room for yuan appreciation in the second half and maintain our call for the year end yuan-US dollar cross at 6.22, albeit with more volatility in-between.
The People's Bank of China probably had wanted to make the move for some time. The calmer global financial market in recent months, compared to the turbulent 2011, finally provided a window of opportunity.
Increased volatility
In theory, the Chinese central bank can easily alter the path of the yuan with its gigantic foreign exchange reserves of US$3.3 trillion, and, in fact, it has executed this power on daily basis. The yuan has barely been "allowed" to touch or get closer to the either side of the daily band.
Out of the 440 trading days since China ended the yuan's peg to the US dollar again in June 2010, there were only 13 days when the yuan deviated by more than 0.25 percent from the central parity set by the central bank. However, volatility within the trading band has increased notably since the third quarter 2011, albeit mostly on the downside.
While we still wait to see how much the central bank will really let go, the grand announcement unequivocally indicated its intention to do so. We expect the actual average daily deviation to increase further and faster.
China has clearly accelerated the pace of capital account openness and currency convertibility in recent months. These steps are no less important than widening the trading band.
Entering 2012, China's policy development has been in line our expectation that the authorities are keener on structural reforms than on cyclical adjustments.
After the band widening, there is all the more reason to expect some small depreciation against the US dollar in the short term, given our expectation for further deceleration in China's economic growth and the risk-off global backdrop. However, we still see room for yuan appreciation in the second half and maintain our call for the year end yuan-US dollar cross at 6.22, albeit with more volatility in-between.
The People's Bank of China probably had wanted to make the move for some time. The calmer global financial market in recent months, compared to the turbulent 2011, finally provided a window of opportunity.
Increased volatility
In theory, the Chinese central bank can easily alter the path of the yuan with its gigantic foreign exchange reserves of US$3.3 trillion, and, in fact, it has executed this power on daily basis. The yuan has barely been "allowed" to touch or get closer to the either side of the daily band.
Out of the 440 trading days since China ended the yuan's peg to the US dollar again in June 2010, there were only 13 days when the yuan deviated by more than 0.25 percent from the central parity set by the central bank. However, volatility within the trading band has increased notably since the third quarter 2011, albeit mostly on the downside.
While we still wait to see how much the central bank will really let go, the grand announcement unequivocally indicated its intention to do so. We expect the actual average daily deviation to increase further and faster.
China has clearly accelerated the pace of capital account openness and currency convertibility in recent months. These steps are no less important than widening the trading band.
Entering 2012, China's policy development has been in line our expectation that the authorities are keener on structural reforms than on cyclical adjustments.
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