News Analysis: Yuan's wider trading band eases one-way bet
The yuan weakened against the U.S. dollar on Monday, the first trading day after the People's Bank of China, the country's central bank, on Saturday announced a lift in the yuan's daily trading limit to 1 percent from 0.5 percent.
The yuan's central parity rate sank 81 basis points to 6.296 against per U.S. dollar on Monday in the country's foreign exchange spot market. And the spread between the day's buying and selling prices was far below the new 1-percent ceiling.
Analysts said the yuan, which has been persistently strong against the greenback in past years, is likely to fluctuate both ways after the move, which was aimed at increasing the market's influence over the yuan's value and paving the way for more market-oriented reforms in China's financial sector.
"As the trade surplus gradually narrows, a widened trading band will help ease expectation for a unilateral appreciation trend," said Zong Liang, a researcher with the Bank of China.
Zong said the yuan's trading market will see more ups and downs, which will help prevent the currency from moving in just one direction and stabilize its exchange rate.
The yuan has gained over 30 percent against the U.S. dollar since the country started exchange rate reforms in 2005.
"The currency is highly likely to be traded both ways against the U.S. dollar during the coming months, as the market expectation for the yuan's value has stabilized since the fourth quarter of 2011," said Lu Zhengwei, chief economist at the Industrial Bank.
The yuan has risen much more slowly against the dollar in recent months. Data from the China Foreign Exchange Trading System showed that the central parity rate of the yuan against the U.S. dollar went up by just 40 basis points during the first quarter of this year.
A Citibank report forecast that the yuan will rise at a slower pace of 1 to 2 percent against the U.S. dollar this year, stating that the momentum for a faster rise of the currency has eased.
But the expectation for a weaker yuan has also triggered concerns that it may lead to a large capital outflux, which will affect the stock and property markets -- major destinations for speculative money.
Analysts said the direct impact on the flow of "hot money" will be quite limited, as they believe the yuan's exchange rate may have approached an "equilibrium" level.
"Judging from the current market, the yuan's price has stayed much closer to a balanced rate," said Gui Haoming, chief analyst with Shanghai-based Shenyin-Wanguo, a leading brokerage company.
"A more flexible yuan may cause both inflows and outflows of hot money under certain circumstances. Therefore, you cannot simply say that the move is good news or bad news for the stock market," Gui said.
Cheng Wenwei, an analyst with China Development Bank Securities, said the move shows that the government has become more capable of handling speculative money.
"Purchasing profits is the nature of the hot money. But the yuan's value is not the only reason for its movement. It also depends on the country's macroeconomic development," Cheng said.
To keep the exchange rate stable, China has set more restrictive rules on trading the yuan against the U.S. dollar in comparison to other currencies. China raised the yuan's trading band against the U.S. dollar to 0.5 percent from 0.3 percent in 2007.
The country bases the yuan's central parity rate against the U.S. dollar on a weighted average of prices before the opening of the market each business day.
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