The People’s Bank of China (PBOC) has announced it will effectively double the trading band for the yuan to 2% in an attempt to foster more volatility and forex responsiveness out of the Chinese currency, according to a Reuters report.
Second Trading Band Augmentation in Two Years
The PBOC’s relinquishing of such a tightly banded exchange rate underscores an effort to make the yuan more competitive as a trading instrument on the world stage. The deviation from a 1% midpoint rate to 2% is slated to take effect on Monday, March 17 – this is hardly the first such example of China easing its currency mechanisms; back in April 2012 the PBOC doubled its trading band from 0.5% to 1%.
Indeed, the yuan’s rigidity has helped quell some of its popularity as a tradable currency in forex. In the absence of floating exchange rates or more market-driven forces, investors are more reticent to risk their money. According to said Fu Qing, Head of foreign exchange trading at Standard Chartered Bank in Shanghai in a statement on the banding expansion, “This is a major step towards building more market-oriented exchange rate mechanisms in China, signifying a gradual withdrawal by the central bank from regular intervention in the foreign exchange market. However, with more volatility in the yuan’s exchange rate created by the reform, Chinese companies will face an uphill task learning how to hedge their currency risks.”
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Yuan Fluctuation Seen as Endorsement for Economic Growth
The yuan is largely seen as chronically undervalued and has been the subject of numerous currency debates over the past few years. However, mounting suspicion of some central banking move gathered steam over the past month given a gradual waning of the yuan’s value, which suggested tinkering by state banks ahead of a potential decision. The Chinese currency has retained its appeal for investors since 2013, in which the yuan rose against the USD by a margin of nearly 2.9%, vastly outperforming other currencies in emerging economies.
“The People’s Bank of China will continue to increase the two-way flexibility of the renminbi exchange rate, keeping the exchange rate fundamentally stable within reasonable and balanced levels,” added the PBOC in a statement on its website.
Furthermore, “China needs to internationalize the yuan and a 1% fluctuation cannot adequately reflect market demand for and supply of the yuan. That the central bank chose to widen the band right now shows, in some ways, that it is confident about the economy,” noted Li Huiyong, an analyst at Shenyin Wanguo in Shanghai.