China sees further widening yuan band an option: central bank official

XIAMEN, China Sat Sep 8, 2012 7:04am EDT

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XIAMEN, China (Reuters) - Further widening the trading band for China's yuan is a policy option that the central bank may adopt in the future to better reflect market forces, a senior official from the People's Bank of China said on Saturday, giving no timeframe.

Guo Jianwei, deputy director of the central bank's monetary policy department, said the yuan exchange rate was approaching an equilibrium level and had been increasingly dictated by market demand.

China's central bank tweaked the trading band this April to allow the yuan to rise or fall as much 1 percent from a mid-point every day, compared with its previous 0.5 percent limit.

"To further widen yuan trading band is a policy consideration in the future, because the yuan formation mechanism will become more market-based," Li told reporters at the sidelines of an investment forum in Xiamen.

"There is still scope for the yuan band to be further extended, if we want to let the market play a bigger role in deciding the yuan exchange rate," he added.

In recent months the currency has moved up and down in value and Li said this provided a good opportunity for further band widening as investors were no longer betting exclusively on appreciation, helping attenuate swings in the market value of the currency.

The yuan has declined steadily in value for much of this year versus 4.7 percent appreciation in 2011, in part due to weakness in the euro and China's economic slowdown, although the currency has recovered somewhat from lows in July.

Over the past seven weeks, the central bank has kept the midpoint between 6.33 and 6.35 against the dollar, in line with the dollar index that has stabilized after climbing sharply as the euro zone crisis deepened.

Guo also said it was a good time for Chinese firms to make overseas investments in yuan to hedge against exchange rate conversion risks. Such investment would also help increase the global status of the Chinese currency.

"Our dream of developing the yuan into a more commonly used global currency is taking shape and I think we have the conditions to realize it eventually," he said.

GLOBAL CURRENCY

The financial crisis and European debt woes had, to some extent, undermined the status of the euro and the U.S. dollar giving the Chinese currency an opportunity to grow into a global currency one day, Guo said.

Beijing has been trying to strengthen the global clout of its currency by promoting the use of the yuan in cross-border trade and investment. It has also signed a series of bilateral currency swap agreements with foreign countries and added new currency pairs in onshore market trading.

But many economists still say it will be a long time before the yuan can become a global reserve currency.

Guo also said there was no risk of massive capital outflows from China, as its economy was still the most resilient in the world and would keep attracting investment in future.

Monthly foreign exchange purchases have grown at a slower pace in recent past months, fuelling concern about capital outflows, with the Chinese economy slowing and the yuan exchange rate weaker.

(Reporting by Aileen Wang; Editing by John Ruwitch and Sanjeev Miglani)

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