China widened the yuan’s trading band for the first time since 2007 as speculation on currency gains declined and to fend off pressure from trading partners for faster appreciation.
The increase to 1 percent from 0.5 percent will take effect tomorrow, the People’s Bank of China said on its Web site yesterday. The previous broadening of the trading band, which is centered on a rate set daily by the central bank, was from 0.3 percent in May 2007.
Expectations for yuan gains dwindled in the past six months as Chinese Premier Wen Jiabao (溫家寶) cut the country’s economic growth target and Europe’s sovereign-debt crisis hurt exports, sparking concern policymakers would curb appreciation. While the yuan reached an 18-year high at 6.2884 against the US dollar on Feb. 10, US President Barack Obama’s administration and US lawmakers argue the currency remains weak enough to give China, the world’s biggest exporter, an unfair advantage in global trade.
“China will avoid significant appreciation or depreciation this year,” Lu Ting (陸挺), an economist at Bank of America Corp in Hong Kong, said after the announcement, citing reasons including an “uncertain” global economy.
The yuan ended this week at 6.3030 per US dollar, up about 8.3 percent since the scrapping in June 2010 of an almost two-year peg imposed during the global financial crisis. Gains have stalled this year and a slowdown in China’s growth combined with official comments that the currency may be near -“equilibrium” are damping expectations for strengthening.
The central bank said yesterday’s move is to meet “market demands,” promote price discovery and enhance the currency’s two-way flexibility. The change improves a managed, floating exchange-rate regime that is based on supply and demand and operates in reference to a basket of currencies, it said.
The monetary authority will keep the currency “basically stable at an adaptive and equilibrium level,” to preserve the stability of the Chinese economy and financial markets, it said.
Twelve-month non-deliverable forwards for the yuan were 0.5 percent weaker than the onshore spot rate on Friday, according to Bloomberg, suggesting that the currency could fall over that period.
Cliff Tan, a currency analyst at Bank of Tokyo-Mitsubishi UFJ in Hong Kong, said yesterday that he was leaving unchanged a forecast for the yuan to reach 6.17 by the end of this year.
The move may mark an early stage of a capital account opening that will be as “momentous” for China as joining the WTO in 2001, Tim Condon, chief Asia economist at ING Financial Markets in Singapore, said in an e-mail.
By increasing two-way exchange rate risk, China can make the currency less attractive as a speculative bet, he said.
The announcement is also a “concrete follow-up” to government statements that the yuan is close to an “equilibrium” level, Condon said.
After keeping the exchange rate stable for a decade, China allowed its currency to strengthen 21 percent from July 2005 to July 2008, including an initial, single-day gain of 2 percent. Appreciation was then halted for almost two years to help exporters weather a global recession.
China could expand the yuan’s trading band to as much as 2 percent, China Business News reported on Dec. 9, citing Chinese Academy of Social Sciences researcher Liu Yuhui (劉煜輝).