Market expectations are building that the National People’s Congress (NPC) meeting beginning this week will signal a further widening of the yuan’s trading band, a move that would be seen presaging a central bank move to push the mainland currency lower to help bolster international competitiveness. Market watchers said there was a window for policymakers to relax the trading band further in order to let the currency reflect market forces to some extent. Given the People’s Bank of China’s clear easing bias, underscored by a cut in bank reserve ratio requirements and two cuts in interest rates, expectations are rising the central bank might also start to guide the yuan weaker against the US dollar. We think the central bank will allow the renminbi to adjust to market forces to some degree Paul Mackel, HSBC Liberalisation of interest and exchange rates has been highlighted as a likely area of focus during China’s two key political meetings, with the Chinese People’s Political Consultative Conference (CPPCC) kicking off its annual meeting on Tuesday and the NPC on Thursday. It is widely expected the government will pledge to give market forces a bigger role in the currency market during the meetings. Spot yuan trading has been constantly hitting the 2 per cent limit of the currency’s trading band since December. It is allowed to trade 2 per cent either side of a reference rate set by the central bank and has been testing the lower limit. “The natural question is ‘how does China’s hands-off FX policy deal with USD-CNY being close to the top of its daily trading band?’ … we think the central bank will allow the renminbi to adjust to market forces to some degree,” HSBC’s head of Asian FX research, Paul Mackel, said. “We believe 2 per cent to 3 per cent spot renminbi depreciation against the US dollar is acceptable for Chinese policymakers in the face of a strong USD trend and will not derail their renminbi internationalisation goal,” Mackel said. Onshore spot yuan is trading at the lowest level since October 2012, the latest in a series of recent lows, which has caused the currency to lose 1.07 per cent against the greenback so far this year. The midpoint rate – the guidance rate set by the central bank every trading day – stood at the weakest level since November last year on Monday. The last time the central bank widened the band was in March last year, when the spot rate repeatedly hit the strong end of the band and the mainland economy showed signs of losing momentum. “Our conversations with staff at the People’s Bank of China suggest that the government is increasingly looking at the exchange rate as a way of being more accommodating,” Credit Suisse analyst Dong Tao said. “Perhaps widening the trading band of renminbi exchange is a sensible option to start with.” However, some market watchers doubt the trading band will be widened again. “If the government wanted to allow for a greater degree of depreciation, it can easily achieve this by moving the fixing higher more frequently and to a greater degree,” UBS economist Tao Wang said. “Widening the trading band now would only further aggravate depreciation expectations, counter to what we believe is the PBOC’s goal of maintaining a largely stable currency.”
