Yuan's band may be widened
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China's central bank may widen the daily trading band of the yuan against the US dollar over the next few weeks as it pursues market liberalization and continue to battle inflation, according to a bank's research note yesterday.
The yuan-dollar daily trading band is expected to double to 1 percent on each side of the daily reference rate from the current 0.5 percent, Standard Chartered Bank said.
The move would come a year after the de-pegging of the yuan from the dollar in middle of last June, but more than three years after China last widened the band on 21 May 2008 from 0.3 percent.
There are signs that China is further relaxing its foreign exchange policy as the country seeks a more market-driven mechanism as its economy and finance industry evolve.
"Official rhetoric has focused on the advantages of greater yuan flexibility as a tool to contain inflation," said the report.
A wider trading band could help the yuan appreciate quicker modestly in the short term to temper persistent inflation, the bank report said.
China has prioritized fighting inflation this year. The May inflation may rise 5.4 percent, according to survey from Caixin Media of 18 economists. China's official target is to keep inflation under 4 percent this year. The official May inflation is set to be released next Tuesday.
An appreciating yuan translates into cheaper imports and help tame inflation.
"Clearly, such a move would also be welcomed by China's key trading partners as a further step towards a market-based exchange rate," Standard Chartered said.
China needs a drastic yuan reform as minor changes to the currency will have minimal impact, Zhou Qiren, an adviser to the People's Bank of China, wrote in a commentary published on Caixin Media's website yesterday.
A more flexibly traded yuan is welcomed by the market but a key uncertainty remains on what extent any band widening would reflect in actual trading as the full limits of the existing band are not being used. The gap between the daily high and low in recent onshore trading of the yuan has averaged just 0.1 percent in May.
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