UPDATE 2-China official paper calls for widening of yuan trading band

Mon Aug 15, 2011 11:59pm EDT

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* Strong exports may curb fears that higher yuan hurts competitiveness (Add analyst comments, backgrounds)

By Fayen Wong and Zhou Xin

SHANGHAI/BEIJING, Aug 16 (Reuters) - The time "is ripe" for China to widen its yuan trading band, the state-owned China Securities Journal said in a front-page editorial on Tuesday, marking the latest call for a more flexible yuan from Chinese commentators and state media.

"The conditions are ready for China to appropriately widen the trading band between the yuan and the dollar," said the paper, which is run by the official Xinhua news agency.

The yuan currently is allowed to rise or fall 0.5 percent a day from its mid-point price, which is set by the central bank every trading day.

In practice, authorities have rarely allowed the yuan near the lower or upper ends of that band.

But the country's central bank has fixed the yuan's mid-point at record highs for five consecutive trading days, leading analysts to speculate that Beijing may give exchange rate policy a bigger role in helping curb stubbornly high inflation.

"The yuan exchange rate has to become more flexible, and widening the band is certainly on the cards," said Lang Qi, an analyst with Huaxin Securities in Shanghai, adding that it was not clear when the bank might make such a move.

"Even if the central bank widens the band, it would be more of a symbolic move announcing that China is making another step in yuan reform than a serious policy change since the current band was rarely touched in the past years," Lang said.

World Bank President Robert Zoellick said on Tuesday that the appreciation of China's yuan would be a positive in helping restore global economic stability and tackling China's inflationary pressure.

"The circumstances have changed a little bit. And so as China started to worry about its inflation rate, that led to some balancing of the consensus in China to move towards appreciation of the currency. That could help deal with some of the inflation rate and is also a contributer, I think, to some of the stability in the international system," Zoellick told reporters in Australia.

Liu Zhaohui, a senior economist with GF Securities in Guangzhou, said China faced additional pressure to accelerate the yuan rise partly because of expectations of a further weakning in the dollar.

Chinese researchers and even government officials have previously argued that the band should be widened so that the onshore yuan movement could be a little more volatile.

The China Securities Journal said the present trading range has made the yuan inflexible and has also made the currency an attractive speculation target, causing the economy to be flooded with excess cash that is amplifying inflationary pressures.

The narrow trading band between yuan and the U.S. dollar in the onshore market has meant that Chinese exporters are reluctant to take more volatile non-dollar currencies in trade, making it difficult for China to slow down dollar accumulation in its foreign exchange reserves, the newspaper said.

The daily trading band between yuan and non-dollar currencies, including euro and yen, is 3 percent in China's onshore spot foreign exchange market.

In its latest quarterly monetary policy report published last Friday, China's central bank repeated its usual wording on exchange rate policy, reiterating that it would keep yuan exchange rate basically stable.

But the pronouncement did little to quiet speculation that Beijing would allow swifter yuan appreciation to help stem inflation.

STRONG EXPORTS MAY GIVE POLICYMAKERS MORE ROOM

Since China's exports were unexpectedly strong in the past months, with a steady growth in the monthly trade surplus, Beijing shouldn't have to worry about possible negative impacts on trade from widening the band, the China Securities Journal article said.

"It's not necessary to be overly concerned about impacts from the debt problem in the United State and Europe as well as global growth deceleration," it said.

"It's a good time window as well: since most international investors already have enough trouble in hand to deal with, (China's reform) will face less interference from speculative capital flows."

The yuan rose was marginally firmer in spot trade on Tuesday to 6.389. Beijing has allowed it to appreciate more than 3 percent so far this year and around 6.7 percent since depegging it from the dollar in June 2010. (Additional reporting by Rob Taylor; Editing by Kim Coghill)

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