More policy changes seen after yuan move

PUBLISHED : Tuesday, 17 April, 2012, 12:00am
UPDATED : Tuesday, 17 April, 2012, 12:00am


Beijing's move to widen the yuan's trading band may be followed by more policy changes as the country grapples with trying to maintain stable capital inflows and economic growth.

Economists say the central government may have to further ease the economic policy to support growth while trying to rely less on the US dollar in its exchange rate regime following the expansion of the yuan's trading band, which came into effect yesterday.

The yuan is now allowed to trade within a 1 per cent band on either side of a mid-point price set daily by the central bank, from 0.5 per cent previously.

The move may herald more volatility in the onshore currency market as economists believe the days of one-way yuan appreciation are numbered.

'Outflows are not necessarily bad,' said Joy Yang, the chief economist for greater China at Mirae Asset Securities. 'A more pressing question for the government is how to attract more sustainable and healthy capital inflows to offset the loss of speculative and volatile inflows that will now ebb with perceptions of limited upside for the yuan.'

Many economists, including those at JP Morgan and Societe Generale, maintain their forecasts that the yuan will still rise 2 to 3 per cent this year. The currency has gained about 30 per cent against the dollar since it was revalued in 2005.

'The role of the dollar as the dominant currency in the current exchange rate regime is likely to decline gradually. Going forward, we believe the central bank may make greater reference to a basket of currencies,' said JP Morgan's chief China economist Zhu Haibin.

The yuan's exchange rate lies at the core of growing Sino-US trade disputes as Beijing refuses to bow to Washington's pressure to let the yuan appreciate faster.

Yesterday, the yuan opened weaker in Shanghai after the central bank set the mid-point rate at 6.296 to the dollar, from 6.2879 previously, hitting a low of 6.325.

Traders saw more volatility as the new policy kicked in.

Citing Beijing's decision to expand its qualified foreign institutional investor scheme, Societe Generale's China economist Yao Wei said the government was eager to keep a stable inflow of foreign capital.

Previously, the one-way appreciation of the yuan was the biggest draw for foreign capital, especially 'hot money', a major driver of soaring property prices in the past few years.

Investors are now shifting focus to whether Beijing will be able to avoid the so-called hard landing and keep growing.

Both Yang and Yao agree that more changes in monetary and overall economic policymaking can be expected following the new yuan band.

They may include a 'window guidance' from the central bank to encourage banks to issue more loans. Beijing may also cut banks' required reserve ratio further to ease liquidity. Tax cuts could also be in the offing in certain sectors.