Yuan trading band tipped to widen but major devaluation ruled out

PUBLISHED : Friday, 19 December, 2008, 12:00am
UPDATED : Friday, 19 December, 2008, 12:00am

Beijing is unlikely to devalue the yuan significantly but could widen the daily trading band of the currency against the US dollar to increase flexibility of the exchange rate, according to a research report by Hang Seng Bank.

'Most probably the mainland will stabilise the yuan at around 7 against the US dollar in the coming year, and widen the daily trading limit to 3 per cent either way from the present 0.5 per cent,' the report said.

The yuan is allowed to trade by up to 0.5 per cent on either side of the central parity rate set by the central bank against the dollar, and up to 3 per cent against non-US-dollar currencies.

The economic slowdown and the weakening of the yuan to the US dollar, particularly in the first few days of this month, prompted expectations that Beijing would reverse its policy of yuan appreciation.

The yuan traded near a one-month high against the dollar yesterday after the government signalled it would not weaken the currency to stem the slide in exports as such a policy might trigger capital outflows.

'The exchange rate should continue to be stable, especially in a crisis,' Commerce Minister Chen Deming was quoted as saying. 'We need to maintain steady growth in trade, but the exchange rate shouldn't be the main factor.'

The yuan closed at 6.8295 to the US dollar yesterday, compared with 6.8357 on Wednesday.

The currency slid 0.7 per cent in the first week of this month, the biggest decline since the mainland began pegging the yuan to a basket of currencies in July 2005.

According to Hang Seng, as export growth responds more to changes in overseas demand than exchange rates, the benefit from devaluing the yuan could be marginal.

While Beijing is still under pressure from the United States and Europe to strengthen the yuan to narrow a huge trade surplus, a change of market expectations from appreciation to depreciation of the yuan could also trigger sudden capital outflow. This makes it difficult for the mainland to depreciate the currency.

Nicholas Kwan Ka-ming, the regional head of economic research at Standard Chartered Bank (Hong Kong), said Beijing could widen the trading band in the long term to allow the exchange rate to be more market-driven.

'But it's difficult to predict whether they will widen the band by as much as 3 per cent,' he added.

Mr Kwan expects the yuan to depreciate to 7 to the dollar and rebound to 6.8 by the end of next year.