News Analysis: Time to widen yuan's daily trading band?
                 English.news.cn | 2013-04-27 19:44:42 | Editor: Chen Zhi
An online post has claimed there are three cartoon cats on the 100-yuan note, but China's central bank denies this and says the prints are based on ancient lacquerware. (Photo: China Daily)

BEIJING, April 27 (Xinhua) -- A year after China widened the daily trading limit of its currency, the yuan, experts are arguing whether it is time to further enlarge the band to make the exchange rate more market oriented.

In mid April 2012, the People's Bank of China (PBOC), the country's central bank, decided to widen the yuan's daily trading limit against the U.S. dollar to 1 percent, up from the previous 0.5 percent.

The move, as announced by the China Foreign Exchange Trading System, has meant Chinese banks can exchange the yuan 1 percent above or below the central parity rate against the U.S. dollar on the spot market.

However, the expansion has proved somewhat inadequate, as the yuan's exchange rate on the spot market rose to the daily limit of 1 percent for 20 consecutive trading days at the end of 2012.

The yuan has showed strong momentum of appreciation since the beginning of this month. By Friday, the Chinese currency's central parity against the U.S. dollar had reached a historic high nine times in the month.

Yi Gang, vice governor of the PBOC, said in a seminar on the exchange rate arrangements of the International Monetary Fund last week that the central bank is currently considering further expanding the yuan's fluctuation limit.

Reforming toward a market-oriented exchange rate mechanism in a progressive manner is a clear direction for China to take, Yi said.

However, Cai Hongbo, an expert with Beijing Normal University, warned that in the context of the yuan's appreciation pressures, the market may misinterpret a further widening of the daily trading band as a signal of the PBOC's rising tolerance about the yuan's appreciation.

"That will further boost market expectation for the yuan's appreciation, which will be harmful for export and the supervision of international capital flow," according to Cai.

But considering China's overall macroeconomic situation, consensus if forming over the necessity of widening the band.

China's foreign trade is becoming increasingly balanced, the yuan's exchange rate is nearing the equilibrium level, and a general trend of two-way exchange rate fluctuation is coming into being, Cai said.

"As a result, the time is becoming ripe for further expanding the trading band," according to the academic.

Liu Dongliang, a senior analyst with China Merchants Bank, echoed Cai's view, saying that widening the band is an inevitable step in the country's drive to make the yuan an international currency.

In the long term, the general direction is to abandon the daily trading limit and unify the onshore and offshore trading of the currency, he said.

According to Liu, it is necessary to widen the current 1-percent limit in a progressive manner.

"The country can widen the band first to 1.5 percent or 2 percent, and make further expansions after a while to allow for more extreme market fluctuations," he suggested.

Analysts also point out that it is not enough to simply widen the yuan's trading band, and the central bank should also make efforts to make the formation of the yuan's exchange rate more market-oriented.

"At present, the formation of the currency's exchange rate is not fully marketized, so the rate can neither reflect real market conditions nor serve as an effective policy tool," said Cai.

The country should integrate the expansion of the trading band with reform of the exchange rate mechanism, Liu added.

Related:

Net forex purchases for fourth month

BEIJING, April 23 (Xinhuanet) -- China witnessed a fourth straight month of net foreign exchange purchases among the central bank and commercial lenders, which suggests continuous capital inflows, as shown by data released by the People's Bank of China (PBOC) on Monday.

Banks brought in nearly 236.3 billion yuan ($38.25 billion) worth of foreign exchange last month on a net basis, boosting the total yuan holdings for purchasing foreign currency to nearly 27.1 trillion yuan. Full story

Chinese banks see forex surplus for 7 months

BEIJING, April 19 (Xinhua) -- China's foreign exchange regulator said Thursday that Chinese banks bought more foreign currency from clients than they sold in March, marking a foreign exchange surplus from bank-to-client transactions for a seventh consecutive month.

Individuals and institutions exchanged 152.2 billion U.S. dollars in foreign currency for yuan through Chinese banks while buying 107.6 billion U.S. dollars in foreign currency from financial institutions in March, data from the State Administration of Foreign Exchange (SAFE) show. Full story

分享
China yuan hits record high against USD Friday
SOEs donate 300 mln yuan to quake area
China yuan advances against USD Thursday
China yuan retreats against USD Wednesday
Melting snow leads to rising water levels in Inner Mongolia
Melting snow leads to rising water levels in Inner Mongolia
Students have classes in prefab houses in quake-hit Lushan county
Students have classes in prefab houses in quake-hit Lushan county
Taizhou Global Commodity Purchasing Center opens
Taizhou Global Commodity Purchasing Center opens
Shangli Ancient Town returns to normal after earthquake hits Ya'an city
Shangli Ancient Town returns to normal after earthquake hits Ya'an city
Thousands of jellyfish on display at Vancouver Aquarium
Thousands of jellyfish on display at Vancouver Aquarium
Mexican President attends Municipalities Annual Conference 2013
Mexican President attends Municipalities Annual Conference 2013
Three-floor Warehouse catches fire in Yerevan, Armenia
Three-floor Warehouse catches fire in Yerevan, Armenia
Morsi, Abbas discuss internal-Palestinian reconciliation
Morsi, Abbas discuss internal-Palestinian reconciliation
Back to Top Close
010020070750000000000000011100001323456701