PBOC Seen Doubling Yuan Band Next Quarter Amid Global Push

China’s central bank is forecast to double the yuan’s trading band in the coming quarter as policy makers loosen exchange-rate controls to promote greater usage of the currency in global trade and finance.

Of 29 analysts surveyed by Bloomberg News in the past week, 20 predicted a move in the April-June period, while four said they expect a revision in March. There were four forecasts for a change in the third quarter and one for the final three months of the year. The People’s Bank of China allows the yuan to diverge a maximum 1 percent from its daily reference rate and 21 analysts in the survey saw the limit climbing to 2 percent in the next adjustment of the trading band.

An expansion would lend weight to China’s pledge to allow its currency to trade more freely and address U.S. criticism that the exchange rate is kept artificially weak to protect Chinese exports. The PBOC included an “orderly” broadening of the yuan’s band among its 2014 policy goals on Feb. 19, while lawmakers will hold annual meetings from next week to decide on major economic policies.

“Yuan internationalization is the PBOC’s top priority and 2014 is a critical year,” said Shen Jianguang, an economist at Mizuho Securities Asia Ltd. in Hong Kong. “China usually implements reforms after the legislature meetings, so the second quarter is a good window for band widening.”

The yuan overtook the Swiss franc to become the seventh most-used global payments currency in January, the Society for Worldwide Interbank Financial Telecommunications said yesterday. The U.K. is in talks with the PBOC on setting up a yuan clearing bank in London, Chancellor of the Exchequer George Osborne said in an interview on Feb. 23.

Record Drop

The yuan tumbled by the most on record today on speculation the central bank will widen the currency’s trading band, allowing greater volatility at a time when China’s growth is slowing. The currency has lost 1.6 percent this month in Shanghai, leading declines in Asia and slipping below the PBOC’s reference rate, China Foreign Exchange Trade System prices show. The spot rate fell 0.51 percent to 6.1600 per dollar as of 12:28 p.m. in Shanghai, 0.6 percent weaker than the fixing, which the PBOC raised by 0.02 percent to 6.1214. The central bank bases its rate on market makers’ quotations.

The yuan dropped below the reference rate on Feb. 25 for the first time since September 2012, having traded 0.75 percent stronger on average in the past year. It was at a 0.24 percent discount to the fixing a day before the last widening of the trading band on April 14, 2012, when the maximum allowed divergence was doubled from 0.5 percent. The trading limit was first raised from 0.3 percent in May 2007.

Speculation Eased

Band widening is likely in the next couple of months as speculation on yuan gains has eased, according to Qinwei Wang, a London-based economist at Capital Economics Ltd. The currency has strengthened 34 percent versus the greenback since China ended a dollar peg in July 2005, the best performance in emerging markets, according to data compiled by Bloomberg.

“We don’t believe that a widening of the renminbi’s daily trading band would make much difference in practice, although many would see it as an important move,” Wang said. “The PBOC is likely to continue its regular interventions to limit renminbi movement using both the daily reference rate and direct trading in the foreign-exchange markets.”

The recent volatility in the exchange rate is normal and huge outflows are unlikely, State Administration of Foreign Exchange said Feb. 26. The market shouldn’t read too much into the drop as it stems from an “adjustment in trading strategy by major market participants,” it said.

“The message implicit here is that we are potentially on the cusp of a new trading regime after a period of adjustment,” said Sacha Tihanyi, a Hong Kong-based currency strategist at Scotiabank who predicts the trading band will be widened in the third quarter. A broader limit will come when the yuan’s two-way volatility increases and the PBOC reforms the way in which it sets the daily fixing, Tihanyi said.

— With assistance by Jessica Zhou, Cynthia Li, and Fion Li

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