Symbolic Yuan Band Widening Seen in China’s Reserve-Status Push

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China’s quest to get the yuan recognized as a reserve currency is fueling expectations that trading limits will be relaxed this year, a largely symbolic move as the government tightens its grip on the exchange rate.

Of 24 analysts surveyed by Bloomberg in the past two weeks, 14 forecast the trading band will be widened in 2015, up from eight out of 22 in a January poll. While the monetary authority currently allows the currency to diverge a maximum 2 percent from a reference rate, the interbank exchange rate has stayed so close to 6.2 a dollar since March 19 that National Australia Bank Ltd. has called the level a de facto peg.

The People’s Bank of China is suppressing exchange-rate swings in the yuan, the only emerging-market currency to keep pace with the dollar over the past year, as it pushes for inclusion in the International Monetary Fund’s Special Drawing Rights. The next five-yearly review is scheduled for October. The yuan failed to make the cut in 2010 as it wasn’t deemed to be freely usable, a condition for entry into the basket of official reserve currencies.

“China’s vocal desire to join the SDR has changed my assessment on the timing,” said Kenix Lai, a Hong Kong-based currency strategist at Bank of East Asia Ltd. “The pace of reforms has accelerated to win inclusion, and a wider yuan band could be among them. I now see a possible move in September or October.” She earlier hadn’t expected a change in 2015.

Narrow Range

Nineteen analysts in the Bloomberg survey see the daily trading band expanding to 3 percent in the next adjustment. Six predict a move in the July-September period, while seven expect a revision in the final three months of this year. One forecasts a change before the end of June. There were 10 estimates for an expansion after 2015.

The central bank last widened the range in March 2014, doubling it from 1 percent. The spot rate traded within 0.2 percent of the band’s weak end from late January to early March this year, on concern over an exodus of funds as economic growth slowed.

The situation has now changed, with the yuan rising 0.9 percent since PBOC Deputy Governor Yi Gang on March 12 confirmed that officials were “actively” in talks with the IMF on SDR inclusion. The yuan’s level at 6.2068 on Tuesday is 1.6 percent off the reference rate of 6.1119.

The currency, known officially as the renminbi, has stayed within 0.4 percent on either side of 6.2 since March 19 as the PBOC boosted the fixing by 0.6 percent. The currency will stay around that level through the next 12 months, according to median estimates in Bloomberg surveys.

Symbolic Step

Any widening would be a “symbolic move” as the spot rate is unlikely to have greater price swings, said Eddie Cheung, Standard Chartered Plc’s Hong Kong-based strategist. United Overseas Bank Ltd. said it could be a “gesture for optics.”

“For the purpose of SDR, China is likely to show more progress on the renminbi front and most likely before the IMF meeting in October,” said Suan Teck Kin, UOB economist in Singapore. “As China keeps its eyes on the SDR basket, the risks of a sharp depreciation would be low.”

Politics could be a hurdle, according to Bank of Communications Co. The U.S., which holds 17 percent of votes on the IMF’s executive board, will discuss China’s pursuit of a market-determined exchange rate at a two-day bilateral dialogue in Washington this week, according to a Treasury official.

“It’s not that easy to win inclusion this year,” said Lian Ping, chief economist at Bank of Communications in Shanghai. “The IMF would have a lot to consider and must reflect the stance and thoughts of major countries.”

Rising Usage

BlackRock Inc. said last week that it’s only a matter of time before the yuan becomes a reserve currency. The IMF’s mission to China last month dropped a long-held view that the yuan was undervalued, and said that it would work with Chinese authorities on inclusion. The currency was the fifth most-used in global payments in April, behind the dollar, euro, British pound and the yen, according to the Society for Worldwide Interbank Financial Telecommunications. It overtook the euro to rank second in global trade finance in 2013.

To bolster its case, China has expanded a network of yuan-clearing banks to 15 cities including Seoul, Paris and Toronto, and plans to start a cross-border payment system this year. A trial program allowing qualified individual Chinese investors to buy overseas securities is set to begin soon.

“A widening of the trading band is a further step in China’s exchange rate reform,” said Zhu Haibin, chief China economist at JPMorgan Chase & Co in Hong Kong. “The most likely outcome is a conditional yes from the IMF, meaning a final review and acceptance in 2016 on condition that the renminbi will become more freely usable.”

For more, read this QuickTake: The People’s Currency

— With assistance by Fion Li, Wenwen Zhang, and Ran Li

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