Yuan Set to Be More Flexible

Oct. 30 - Renminbi trading band may be broadened this year, say analysts

China might, in the last two months of the year, further broaden the permitted fluctuation limits of the yuan to the daily mid-point set by the central bank, analysts forecast.

"We expect such fluctuation limits to be extended from the current 1 percent to 2.5 percent after the United States presidential election, and the 18th National Congress of the Communist Party of China (due to start on Nov 8)," said Lu Zhengwei, chief economist at the Industrial Bank.

He said interest rates and banks' reserve requirement ratio are unlikely to be adjusted in November given the current economic situation.

Li Wei, an economist at Standard Chartered Bank, said: "No one can rule out the possibility that the trading band is further widened. Such a move would send a strong signal to the market that the yuan is further liberalized and more market-driven.

"This would also be in line with China's long-term economic reform in a bid to improve market efficiency."

He declined to comment on the possible timing for such a move, but said a more flexible yuan will eventually come about and Chinese businesses will have to adapt to this change and come up with better business practices.

Chen Daofu, policy research chief of the Financial Research Institute at the State Council's Development Research Center, said: "The current fluctuation limits already seem sufficient for the market."

He said broadening the yuan's range depends on the demand of market players, and if market forces demonstrate greater appetite for trading in the currency, such a decision might follow.

The People's Bank of China, the central bank, announced in April that the yuan would be allowed to fluctuate by 1 percent from a daily mid-point - double the previous 0.5 percent.

Since then, the currency has depreciated against the dollar while the world's second-largest economy slowed for seven consecutive quarters, before starting to pick up in recent months as it stabilizes and major economies such the US, the European Union, the United Kingdom and Japan announced new easing policies.

The yuan has strengthened more than 2.4 percent since touching its weakest point of the year at 6.3967 in late July. Compared with the start of the year, it has appreciated by 0.8 percent.

"What the central bank needs to fix now is not to broaden the floating band of the yuan, but to solve the deviation in the daily reference rate it set from the real market situation," said Ding Zhijie, dean of the School of Banking and Finance at the University of International Business and Economics in Beijing.

"If we look at the past few months since the band was broadened to 1 percent, 99 percent of the daily yuan fluctuations did not touch the upper and lower limits at all."

He said the problem is that the official daily pricing cannot sufficiently reflect market demand. "For instance, today (Monday), the central bank set the mid-point at 6.299 against the dollar. In just 15 minutes the trading price went to 6.245."

On Monday, the mid-point for the yuan had been increasing for three straight days, hitting its strongest level since May 11.

Yu Yongding, a former adviser to China's central bank, said in September that it is time for the central bank to reduce intervention in currency markets and let the yuan float freely.

Liu Yuhui, director of the financial lab at the Chinese Academy of Social Sciences, said China should take advantage of the opportunity that market sentiment might drive down the dollar to broaden the floating range of the yuan.

"It is easier for policymakers now to allow market pressures to operate in the foreign exchange market than it was before, as conditions have changed," said Louis Kuijs, chief China economist at the Royal Bank of Scotland Group and a former World Bank economist.

Previously, with a large balance of payments surplus, China's central bank had to intervene massively to prevent market pressures from driving the yuan up sharply. "As such a surplus came down ... it can at the moment let the currency be determined largely by market forces without seeing a sharp appreciation," Kuijs said.

Widening the band could make sense as a controlled next step in financial and monetary reform, he said, adding that China's economy and financial system are robust enough to withstand further flexibility in the exchange rate.

"In any case, it would be more appropriate than moving aggressively on opening the capital account while keeping the exchange rate regime as it is."

A more flexible exchange rate regime is needed to move to a more interest rate-oriented monetary policy and is also a condition for further opening up the capital account, Kuijs said.