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Yuan Band May Challenge Companies, China Academic Says

The wider yuan trading band may challenge Chinese companies trying to hedge against currency risks amid “extremely easy” monetary policy in developed nations, a senior government researcher said.

“China is determined to push forward market reform on the exchange rate,” Zhang Yansheng of the National Development and Reform Commission, the country’s top economic-planning agency, said April 17 in an interview in Beijing. “On the other hand, the reform also raises a big question: how to help companies, banks, and the state find more tools to manage the foreign-exchange risks.”

The People’s Bank of China doubled the yuan’s daily floating band against the U.S. dollar as of April 16 in the first widening since 2007, giving markets a bigger role in deciding the exchange rate. Chinese officials have complained that record monetary stimulus in the U.S. and other countries has stoked excessive capital inflows to emerging markets.

Volatility in the yuan’s exchange rate will increase as it will now be more closely linked to a basket of currencies instead of the U.S. dollar, said Zhang, secretary-general of the agency’s Academic Committee who previously headed the NDRC’s institute for international economics.

“That means greater risks for companies” as they hedge against currency fluctuations, he said. Companies are also coping with “rampant” speculation in global foreign-exchange markets, Zhang said.

The yuan weakened less than 0.1 percent today to 6.3065 against the dollar at 11:28 a.m. in Shanghai.

Free-Trade Reversal

Some signs of reversal in global free-trade efforts may also complicate China’s attempts to introduce market-oriented changes in the yuan and the nation’s financial system, Zhang said.

The U.S. Federal Reserve has indicated interest rates will stay close to zero through at least late 2014, while the European Central Bank cut its benchmark rate to a record low of 1 percent in December.

Overseas sales from China rose 8.9 percent in March, compared with a 35.8 percent rise a year earlier, as fiscal woes in Europe and a slowdown in U.S. job growth hurt demand for Chinese products. The Asian nation in February registered the biggest monthly trade deficit since at least 1989, easing speculation for appreciation in the yuan.

China chose to widen the band when market expectations for appreciation have eased, Zhang said. The decision came even as exporters face increasing trade barriers from other nations and shows the government’s commitment to slow growth and reduce reliance on foreign trade, Zhang said.

Two-Way Volatility

Qu Hongbin, HSBC Holdings Plc’s chief China economist, said the “appreciation story is over” and predicted greater two-way volatility in the yuan following the April 14 announcement on the trading band’s widening. The currency gained 4.7 percent against the dollar in 2011 and about 24 percent in the five years through December.

U.S. policies to encourage domestic manufacturers to return to their home market are an example of growing protectionism as countries try to keep jobs amid slow economies, Zhang said.

U.S. President Barack Obama has expanded on his proposals for encouraging manufacturing and energy production, saying companies must be rewarded for bringing jobs back from nations including China. Obama has proposed requiring companies pay a minimum tax for profit earned overseas.

Zhang said such steps “cannot go too far” and represent a reversal from opening up markets. The U.S. should focus on boosting services and high-technology production rather than manufacturing things like textiles, he said.

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