PBOC’s Yi Says Yuan Floating Band to Be Widened Further

The yuan’s trading band will be widened “in the near future,” said Yi Gang, deputy governor of the People’s Bank of China, after the currency rallied yesterday to a 19-year high.

“The exchange rate is going to be more market-oriented,” Yi said at an International Monetary Fund conference in Washington yesterday. “Last year, they increased the floating band from 0.5 percent to 1 percent. I think in the near future they’re going to increase the floating band even further.”

China may come under pressure to quicken appreciation of the yuan from members of the Group of 20 nations and the IMF meeting in Washington this week. A U.S. Treasury Department report last week called the currency “significantly undervalued,” and asked Japan to refrain from devaluing the yen.

The yuan closed yesterday at a 19-year high of 6.1723 per dollar in Shanghai, the upper limit of a trading range that spans 1 percent either side of the central bank’s daily reference rate. The fixing was cut 0.12 percent today to 6.2416, the biggest decline since August and forcing a weakening of the currency. The spot rate slipped 0.13 percent to 6.1805 as of 11:53 a.m. local time, the biggest drop in two months, based on China Foreign Exchange Trade System prices.

Two-Way Moves

“It is to encourage two-way volatility and is a part of their strategy for managing capital flows,” said Ramin Toloui, global co-head of emerging markets in Singapore at Pacific Investment Management Co., referring to the widening of the band. “They are trying to inject a bit of uncertainty into the market and some two-way movements in the currency, in order to avoid people believing that the renminbi is a one-way bet.”

The central bank in April 2012 widened the trading band to 1 percent from 0.5 percent on either side of its daily fixing against the dollar. The yuan has been within 0.1 percent of its ceiling most days since October.

Of 20 analysts surveyed by Bloomberg News in November, 12 forecast the yuan’s trading band would be widened in 2013, while eight predicted it would take place in 2014. Seventeen said the next change would lead to the yuan being allowed to diverge 1.5 percent to 2 percent from the reference rate.

Offshore Yuan

In Hong Kong’s offshore market, the yuan fell 0.06 percent to 6.1805 per dollar, according to data compiled by Bloomberg. Twelve-month non-deliverable yuan forwards rose 0.02 percent to 6.2520, a 1.1 percent discount to the onshore exchange rate. The yuan is expected to be at 6.10 at the end of March 2014, based on the median estimate of analysts surveyed by Bloomberg.

The PBOC scrapped a decade-old peg of 8.3 per dollar in July 2005 and the currency has since strengthened 34 percent. It kept the yuan near 6.83 for about two years through June 2010 as the global financial crisis battered exports.

The central bank will broaden the currency’s trading range in the next step of its exchange-rate reforms, the China Daily newspaper reported yesterday, citing Wang Yu, deputy director-general of the PBOC’s research bureau.

The monetary authority will also free up trading in its currency by allowing more market participants and lower transaction costs, the state-run China Daily said. The report didn’t give details of how much the yuan’s band will be widened or when the change will be made.

Yi told reporters after the conference in Washington that current market conditions make it “appropriate” to consider widening the band. “It’s good for the market,” he said.

The band will probably be widened this quarter, Credit Agricole CIB analyst Anthony Lam wrote in a research note today. Speculation of such a move may be “the force” driving gains in the yuan, which set new 19-year highs on each of the last four trading days.

Current Account

“The flexible exchange rate appreciating both in nominal and in real terms really made a difference for the adjustment of the current-account surplus as a percentage of our GDP,” Yi said in his conference panel presentation in Washington. “The exchange-rate regime will continue to reform in the market-oriented direction, and to make market demand and supply, to a large extent, determine the rate.”

The surplus as a proportion of the economy “peaked in the 2007-2008 period and has since then declined,” Yi said. “It was 1.9 percent in 2011 and 2.3 percent in 2012, so in the 2 percent range.”

U.S. Treasury Secretary Jacob J. Lew reiterated yesterday that China needs to allow further yuan appreciation. The onshore yuan has advanced 0.8 percent against the dollar this year after rallying 1 percent in 2012 and 4.7 percent in 2011.

“We are concerned that in recent months, movement towards more currency flexibility appears to have slowed,” Lew said at Johns Hopkins University’s School of Advanced International Studies. “The pace of China’s intervention in the market has picked up.”

Record Reserves

The nation’s foreign-exchange reserves, the world’s largest, increased by $128 billion to a record $3.44 trillion in the first quarter of this year, official data show. Lew urged G-20 officials to follow through on a pledge to refrain from influencing exchange rates at the expense of other countries.

“We will continue to press G-20 countries to avoid a downward spiral of ‘beggar thy neighbor policies,” Lew said yesterday ahead of meetings of finance ministers starting today. “It is imperative that all G-20 countries follow through on their recent commitment not to target exchange rates for competitive purposes.”

The G-20 will affirm that commitment, according to a draft statement prepared for a meeting this week in Washington, Bloomberg BNA reported.

BOJ Policy

The Bank of Japan surprised markets on April 4 by doubling monthly bond purchases to almost match the Federal Reserve’s monetary easing, and by setting a two-year horizon for achieving its goal of 2 percent inflation. The Treasury Department, in its April 12 report to Congress, stopped short of declaring either Japan or China currency manipulators.

Lew traveled to China last month and said he pressed the country’s new leadership on the exchange rate. A market-determined yuan is in China’s interest, and “they recognize the need to do it for internal reasons as well,” Lew said during his two-day visit.

PBOC’s Yi said China is “closely monitoring” the aftermath of the policies in certain countries. If big depreciation in one currency causes competitive depreciation from other countries, “that won’t be a situation the IMF nor the G-20 would like to see,” he said.

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