Widened yuan range to spark 'fireworks'
Beijing's decision to widen the daily trading band of the yuan against the US dollar - the first adjustment in nearly five years - paves the way for a freely convertible currency and more fireworks in the nation's financial reform, according to economists.
Starting from today, the yuan is allowed to rise or fall within 1 per cent of the trading band, against the 0.5 per cent range previously, the People's Bank of China said on Saturday.
Some economists said they had expected the band to be widened to just 0.7 per cent, but pointed out that the wider the trading range, the higher the risks. Once the currency trades beyond the trading band, the central bank will intervene.
Dai Xianglong, chairman of the National Social Security Fund, said at the Boao Forum in Hainan two weeks ago that the central government preferred market forces to drive yuan reform, and that now the time was ripe to push forward and make it an international currency for investments, reserve and trade settlement.
HSBC chief economist Qu Hongbin anticipated more 'fireworks' in liberalising the mainland's current account by globalising the yuan, liberalising domestic bond markets, and breaking the monopolies of the banking sector. He said the mainland's shrinking trade surplus, which accounted for about 2 per cent of gross domestic product last year compared with the peak of 7.5 per cent in 2007, provided favourable conditions to relax restrictions on capital inflows.
Daiwa Capital Markets chief economist Sun Mingchun said widening the range was part of a wave of initiatives the central government has unveiled since the national financial working group met in January, a once-every-five-years meeting that sets the agenda for financial reform.
'The move means investors will have to spend more money hedging against yuan exchange,' he said. 'It is one of many necessary steps to globalise renminbi until we see its exchange rate freely floating, which may take five or 10 years.'
Dai's comments on the yuan coincided with a government decision to lift the cap on investments foreigners could make in the mainland securities market, under the US-dollar-denominated Qualified Foreign Institutional Investor scheme, by US$50 billion to bring the total to US$80 billion. The quota under the yuan-denominated QFII scheme jumped by 50 billion yuan (HK$61.4 billion), to a total of 70 billion yuan.
Some economists are intrigued at the timing of the trading-band expansion, which took place a few days ahead of the International Monetary Fund and the Group of 20 meetings in Washington. They said China could face pressure, particularly from the US, on yuan appreciation.
Bank of America Merrill-Lynch economist Lu Ting said the pressure was eased recently on the back of dwindling exports and the current account surplus, and an approximate 30 per cent appreciation of the yuan against a basket of currencies since de-pegging from the greenback in 2005.
'The room for RMB-USD appreciation is very limited, so the PBOC is under big pressure to build up a new forex regime. The intermediate goal of yuan-exchange-rate-regime reform is to benchmark the yuan's value to a trade-weighted basket.'
is where the yuan ended last Friday to the US dollar, from which it was de-pegged in 2005