Yuan Drops Most in Three Months as China Widens Band

Yuan Drops Most in Three Months as China Widens Trading Band
A more flexible yuan may help central bank Governor Zhou Xiaochuan control inflation and support an economy that the World Bank sees growing 8.2 percent this year. Photographer: Stefen Chow/Bloomberg

The yuan fell by the most in a week against the dollar as China’s central bank doubled the daily trading band, reflecting declines in emerging-market currencies.

The People’s Bank of China now allows 1 percent moves from a daily fixing, after keeping the limit at 0.5 percent since May 2007. The Dollar Index, tracking the greenback against currencies of trading partners, climbed 0.2 percent, after a 0.8 percent jump on April 13, amid concern Europe’s debt crisis is worsening. One-month implied volatility for the yuan, a measure of exchange-rate swings used to price options, jumped 20 basis points to 2.5 percent, the highest since March 14.

“The yuan is weaker as investors are again worried about Europe and a bit on China’s growth,” said Tommy Ong, the Hong Kong-based senior vice president of treasury and markets at DBS Bank (Hong Kong). “It’s an opportune time for China to widen the band when appreciation expectations aren’t so strong. That won’t induce any massive speculative bets on its currency.”

The yuan fell 0.19 percent to close at 6.3150 per dollar in Shanghai, the biggest decline since April 5, according to the China Foreign Exchange Trade System. The People’s Bank of China set its fixing 0.13 percent lower at 6.2960 per dollar. The yuan weakened as much as 0.46 percent from that rate, not making use of the new limit.

Offshore Trading

In Hong Kong’s offshore market, the yuan declined 0.18 percent to 6.3110 per dollar. Twelve-month non-deliverable forwards dropped 0.34 percent to 6.3540, a 0.6 percent discount to the onshore spot rate.

“The move is not likely to have an immediate or large impact on the yuan,” said Nizam Idris, head of foreign-exchange strategy for Asian markets at Macquarie Group Ltd. “The decision underlines China’s confidence that the economy is on a sound footing. We maintain the view that the yuan will continue to see pressure for appreciation.”

Idris forecast the yuan will end 2012 at 6.10, giving the currency a more moderate 3.2 percent appreciation for 2012, compared with annual gains averaging 4.4 percent in the last five years. The yuan has fallen 0.1 percent this year, the third-worst performance in Asia, after the Japanese yen and Indonesia’s rupiah.

New Rules

A more flexible yuan may help central bank Governor Zhou Xiaochuan control inflation and support an economy that the World Bank sees growing 8.2 percent this year. The timing of the move may be intended to mute criticism of Chinese currency policies at International Monetary Fund and Group of 20 meetings and indicates that the scandal engulfing former Chongqing chief Bo, 62, will fail to stall the nation’s economic opening up.

The new rules for yuan trading follow increases in quotas for foreigners buying stocks and bonds in China and in the amount of yuan held offshore that can be invested locally. A five-year plan running through 2015 calls for officials to keep loosening controls on capital flows as the nation moves towards a convertible currency.

President Barack Obama’s administration says Beijing still keeps the exchange rate artificially weak, hurting American manufacturers and contributing to a U.S. trade deficit with China that rose 8 percent to $295 billion last year.

“They are confident that market reaction would be for more two-way moves, rather than a lopsided bet on yuan appreciation,” Frances Cheung, a strategist at Credit Agricole CIB in Hong Kong, wrote in a report today. “This follows from their assessment that the yuan is largely at equilibrium level.”

An unexpected surge in new loans in March, reported last week, showed that the ruling Communist Party is trying to avoid a deeper growth slide as the nation prepares for a once-a-decade power transfer to younger leaders.

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