Yuan to be made more flexible

PUBLISHED : Sunday, 15 April, 2012, 12:00am
UPDATED : Sunday, 15 April, 2012, 12:00am

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The People's Bank of China is doubling the size of the yuan's trading band, another step in its internationalisation. Beijing is also hoping that by making the currency more flexible it can deflect criticism from trading partners that it manipulates the yuan.

From tomorrow, the yuan will be permitted to trade within a 1 per cent daily band, the central bank said in a statement on its website yesterday. The bank last widened the trading band in May 2007, when it went from 0.3 per cent to 0.5 per cent.

The bank will not intervene in the currency as long as it goes up or down within the pre-set trading band. That means from tomorrow, the yuan can rise or fall by 1 per cent on any trading day.

The move comes just a few days before the International Monetary Fund and the Group of 20 hold talks in Washington, where China could come under pressure, especially from the United States, to let the yuan appreciate. The US Treasury was scheduled today to issue its semi-annual report to Congress on currencies, which is watched for signs of which countries the US believes are manipulating their currencies for unfair trade advantage. But the report's release was delayed.

The yuan has risen almost 30 per cent against the US dollar since 2004, but US politicians still argue that Beijing has manipulated the currency to keep it undervalued and make the country's exports more competitive. Despite the yuan reaching an 18-year high in February of 6.2884 yuan to the dollar, US President Barack Obama's administration and certain US politicians complain that the yuan remains weaker than they say it should be. The yuan ended last week at 6.3030 to the US dollar.

Kenny Lee Yiu-sun, chief executive of First China Securities in Hong Kong, said: 'Political pressure is one of the factors that led the PBOC to widen the trading band, as now China can claim it is moving forward to let the yuan be traded more freely than before. The doubling of the yuan's trading band will help shut the mouths of some US politicians who always complain that China is manipulating the currency.''

The People's Bank of China said in its statement that the widening of the band was aimed at meeting 'market demands, promoting price discovery, and enhancing the currency's two-way flexibility. The change improves a managed, floating exchange-rate regime that is based on supply and demand.' The central bank said it 'will keep the currency basically stable ... so as to preserve the stability of the Chinese economy and financial markets'.

Lee said now was the right tine to widen the trading band, because the general market expectation was for the yuan to trade around current levels, or even to weaken in the short term. Currently, China would prefer a softer yuan to help exporters given that economic growth is slowing. Premier Wen Jiabao said last month that China expects the economy to expand by 7.5 per cent this year; since 2005 the government had set a growth target of 8 per cent. First-quarter growth was 8.1 per cent year-on-year, the lowest in three years.

Edward Chow Kwong-fai, deputy chairman of the Business and Professionals Federation of Hong Kong, said Hong Kong companies would now need to do more yuan hedging, which could add to their operating costs. However, he said, 'overall, it is good for the yuan to be traded like other international currencies, as that will encourage companies to settle their cross-border trade in yuan instead of the US dollar'.