March 5 (Bloomberg) -- China may “appropriately” widen the yuan’s trading band to better reflect market supply and demand, the official Xinhua News Agency reported, citing People’s Bank of China Governor Zhou Xiaochuan.
Zhou said the yuan has gradually met the requirements to become more of a free-floating currency, Xinhua reported. As China improves its industrial structure and gradually reduces its trade surplus, the yuan is now moving “very close” to a “balanced level,” Xinhua reported in English, citing Zhou.
The Chinese yuan, also called the renminbi or RMB, has appreciated 32 percent since July 2005 when the government abandoned a peg to the U.S. dollar. The central bank announces a central parity for the yuan against nine other currencies every trading day and then allows the yuan to strengthen or weaken by 0.5 percent from the rate. It has drawn criticism from the U.S., which says the practice hurts its manufacturers.
“The RMB exchange rate has gradually met the requirements for greater floating,” Zhou told Xinhua in an interview at China’s annual parliamentary session. “The PBOC is considering that the yuan’s daily floating band could be increased.”
The central bank last expanded the yuan’s trading band against the dollar from 0.3 percent to 0.5 percent in May 2007. A phone call to the central bank’s press office went unanswered after business hours in Beijing.
The suggestion control over the yuan may be loosened signals that policy makers may reduce dollar purchases that limit gains in the currency because it is now closer to an equilibrium level determined by the current account balance, said Jeremy Brewin, who oversees about $4 billion of emerging-market debt at Aviva Investors in London.
“They won’t intervene much to support or weaken the currency if there’s normal trading,” Brewin said by phone. “It’s a healthy development.”
The surplus in China’s current account, the broadest measure of trade and services, probably narrowed to 3 percent of gross domestic product in 2011, the State Administration of Foreign Exchange said in a statement last month. The surplus will shrink further to 2 percent of GDP next year, from more than 10 percent in 2007, according to the median forecast of six economists surveyed by Bloomberg.
The central bank has been buying dollars to slow the yuan’s appreciation and reduce costs and exchange-rate volatility for Chinese exporters. The practice has seen foreign-currency reserves jump four-fold to $3.2 trillion since the end of 2005.
U.S. lawmakers accuse China of keeping the currency artificially weak, undermining U.S. manufacturers. The Senate last year approved a bill that would let U.S. companies seek tariffs to compensate for China’s undervalued yuan. The legislation has stalled in the House of Representatives.
Allowing the currency to trade more freely is for China’s “own benefit,” said Brewin. “It’s a pretty sensible in the medium to long-term because they are no longer seen as someone who is eating into a limited global export market.”
The yuan declined to its weakest level in almost a month in Shanghai today on speculation policy makers will slow appreciation as growth in Asia’s biggest economy decelerates. The central bank weakened the currency’s daily fixing by the most since November 2010 today, setting it 0.22 percent lower at 6.3121 per dollar.
Premier Wen Jiabao set an economic growth target of 7.5 percent for this year, the slowest rate since 2005, in a speech at the National People’s Congress in Beijing today. The world’s second-largest economy expanded 8.9 percent in the last three months of 2011, the least for 10 quarters, as Europe’s debt crisis eroded export demand and a cooling housing market slowed investment.
Wen also told the country’s top legislature today that China will improve the mechanism for setting the exchange rate, make the currency regime more “flexible,” and keep the yuan “basically stable at an appropriate and balanced level.”
Twelve-month non-deliverable yuan forwards traded at 6.29 per dollar, indicating traders are betting that the currency will appreciate over the next year, according to data compiled by Bloomberg. The yuan will strengthen to 5.92 per dollar by the end of 2013, according to the median of 14 analysts’ estimates compiled by Bloomberg.
China will adopt a gradual approach to currency reform as the nation seeks to keep economic growth stable amid a shrinking global export market, said Win Thin, global head of emerging markets strategy at at Brown Brothers Harriman & Co. in New York
“It will be a very gradual move, especially in the current environment,” Thin said. “I wouldn’t expect anything imminent.”
To contact the reporter on this story: Ye Xie in New York at firstname.lastname@example.org