Daily trading band of yuan may be expanded to 3%
Print Edition
ECONOMISTS have predicted that China will soon expand the daily trading band of the yuan to 3 percent after a recent promise of a more flexible exchange rate.
The State Council, China’s Cabinet, announced last Friday that it will broaden the yuan daily trading range but did not disclose more details or the timeline.
Currently, the Chinese banks can exchange yuan at the foreign exchange spot market at 2 percent above or below the central parity rate against the US dollar announced by the China Foreign Exchange Trading System each trading day.
Liang Hong, a macro analyst with CICC, wrote in a research note that the plan is likely to be implemented within the next two months by widening the band to 3 percent around the fixing rate. If confirmed by the central bank, the move will mark an important step to let the market play a larger role in determining the yuan’s relative prices, Liang said.
Spelling out a similar forecast, a report by Huatai Securities said the action showed China was hastening its financial reform in response to the vulnerability of a financial system exposed by the volatile equity market.
China takes a gradual and steady pace in raising its currency’s daily trading limit, from 0.3 percent in 1994 to 0.5 percent in 2007, and 1 percent in 2012 to 2 percent in 2014.
Both institutions believe a widened trading band will be a boon to the yuan’s inclusion into the currency basket of the Special Drawing Rights (SDR) of the International Monetary Fund.
Liang said the move will reduce the technical barriers, while Huatai Securities thought it is another step toward the liberalization of the currency and showed a positive signal that China will continue to push forward reforms.
The IMF is conducting its five-year review of the SDR basket this year and will decide whether to include the yuan into its basket this fall.
The yuan appreciated by more than 30 percent after the central bank loosened its grip on the exchange rate in 2005, and analysts believe the value of the yuan has reached equilibrium.
The yuan stood at 6.1176 against the US dollar yesterday. Liang said policy-makers were still cautious when reforming forex. “China’s financial markets, especially its forex market, remain underdeveloped and do not seem well-prepared for even greater exchange rate fluctuations,” Liang said. “The People’s Bank of China may not let the dollar peg go any time soon.”
However, “an increasingly market-based exchange rate regime implies that the PBOC will gradually withdraw from forex interventions.” Liang added.
Analysts expect the yuan’s exchange rate may stay on the weak side in the short term after the band widening but will not fall into a losing streak in the long run.
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