Yuan’s Trading Band Seen Widening Further, China Daily Reports

The next step in China’s exchange-rate reform will be a further widening of the yuan’s trading band, China Daily reported today, citing a central bank official.

The People’s Bank of China will also free up trading in its currency by allowing more market participants and lower transaction costs, the state-run newspaper said, citing Wang Yu, deputy director-general of the PBOC’s research bureau. The report didn’t give details of how much the yuan’s band will widen or when the change will be implemented.

The PBOC doubled the band a year ago to 1 percent on either side of its daily reference rate, which was set at 6.2342 per dollar today. The yuan strengthened 0.16 percent to 6.1733 as of 12:20 p.m. in Shanghai and earlier touched a 19-year high of 6.1726, the upper limit of its permitted trading range. It has been within 0.1 percent of the ceiling most days since October and tested the lower end in July 2012.

“I do believe that there will be a band widening sometime in the second quarter,” said Sean Yokota, head of Asia strategy at Skandinaviska Enskilda Banken AB in Singapore. “You do have a political transition finishing and they do want to liberalize the yuan” to cope with appreciation pressure from capital inflows, he said.

Premier Li Keqiang took office a month ago and said he would deepen exchange-rate reform and open the economy more to market forces. Yuan positions at Chinese financial institutions stemming from foreign-exchange transactions, a gauge of cross-border capital flows, climbed 295 billion yuan ($47.7 billion) in February, central bank data showed on April 10. Increases are a sign of inflows and January’s 684 billion yuan gain was a record.

‘Appropriate’ Band

Of 20 analysts surveyed by Bloomberg News in November, 12 forecast the yuan’s trading band would be widened in 2013 while eight forecast such a move for 2014. Seventeen predicted the next change would lead to the yuan being allowed to diverge from the PBOC’s daily fixing by somewhere in the range of 1.5 percent to 2 percent.

The existing 1 percent band is “appropriate,” PBOC Deputy Governor Yi Gang said March 11 in Beijing. The central bank reiterated April 3 it will keep the yuan’s exchange rate “basically” stable and further reform the exchange-rate mechanism.

“The trading band news added some excitement but it’s already expected as part of a long-term market reform,” said Irene Cheung, a currency strategist in Singapore at Australia & New Zealand Banking Group.

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