China doubles yuan trading band, brings more risk to FX market
Credit: Reuters/Jason Lee
A woman counts Chinese yuan notes at a market in Beijing, July 1, 2013.
The People's Bank of China (PBOC) announced that effective March 17, the exchange rate will be allowed to rise or fall 2 percent from a daily midpoint rate set each morning by the central bank.
The central bank previously doubled the trading band to 1.0 percent from 0.5 percent in April 2012.
'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 move was widely expected after the central bank, in apparent co-ordination with major state-owned banks, drove down the yuan's exchange rate from mid February through to early March using a combination of setting weaker midpoints and direct intervention to buy dollars and sell yuan.
Traders said the decline was engineered to target speculators betting on a one-way appreciation of a currency that has trended higher since a landmark revaluation in 2005.
However, traders said that in recent weeks it appeared that although the intervention had decreased, the market continued to price the yuan lower and closer to the midpoint, indicating bullish sentiment had eased; this cleared the way for the PBOC to widen the trading band without worrying that the rate would immediately leap upward.
Capital flowed aggressively into China from overseas sources in 2013 and the beginning of 2014, seeking to cash in on the yuan's rise and the relatively high yields of Chinese assets. But regulators have been concerned such flows could distort the country's still-rocky economic recovery.
Although widening the band is aimed at introducing more two-way price swings into the market, the last change in April 2012 largely failed to do so. Instead, the spot price has consistently traded near its strongest permissible level after briefly heading lower following the band widening.
Beijing has committed to letting the market determine the yuan's value, part of a wider project to encourage international use of the currency.
China unwrapped its boldest set of economic and social reforms in nearly three decades at a leadership conclave last year, aiming to give the economy fresh momentum as three decades of breakneck growth shows signs of faltering.
(Reporting by Pete Sweeney and Lu Jianxin; Editing by Neil Fullick)
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