* Central bank widens band; yuan can move up or down 2
percent from midpoint
* Last widening occurred in April 2012
* Seen as introducing more risk into market to discourage
* Cbank intervened to push down exchange rate in Feb-Mar
* Yuan down 1.6 pct in 2014
* Traders question effectiveness of widening if midpoint
used as leash
By Pete Sweeney and Lu Jianxin
SHANGHAI, March 15 China's central bank loosened
its grip on the yuan on Saturday by doubling the daily trading
range for the currency, adding teeth to a promise it would allow
market forces to play a greater role in the economy and its
Analysts said the move was a sign of confidence that the
central bank had successfully fought off a plague of currency
speculators, and at the same time signalled that regulators
believe the economy is stable enough to handle more promised
reforms going forward.
But as far as Beijing's project to encourage the
international usage of the yuan is concerned, there is less
consensus, with some warning that more volatility could
discourage firms from using the yuan in the short run.
The People's Bank of China (PBOC) said the exchange rate
will be allowed to rise or fall 2 percent from a daily midpoint
rate it sets each morning. The change is effective
"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," said Fu Qing, head of foreign exchange
trading at Standard Chartered Bank in Shanghai.
"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."
Many market participants have long viewed the yuan as a
one-way appreciation bet. Authorities are trying to change that
by demonstrating that it is now more of a genuine market that
can go up and down like any other.
"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," the PBOC said in a statement on its website.
A PBOC spokesman in a separate statement said that the new
flexibility would help improve efficiency and increase the
decisive role of the market to allocate resources.
The widening of the band had been broadly expected after the
yuan fell in value from mid February through early March.
Traders suspected that the central bank, working through state
banks, pushed the currency down to try to force those
speculating on appreciation to unwind their positions.
The idea was to leave the market more balanced between
buyers and sellers to reduce the chances of dramatic moves once
the trading band was widened.
The central bank's clamp down came after it had guided the
yuan to rise 2.9 percent against the dollar in 2013, far
outperforming other emerging economy currencies and surprising
markets, which had not been so bullish.
That rally encouraged capital to flow into the country
betting on a steady increase in Chinese interest rates, which
made Chinese assets relatively attractive given the weakness of
Many Chinese importers even inflated their receipts to bring
in more cash to speculate on the yuan, which repeatedly and
massively distorted the country's trade figures in certain
However, since the beginning of 2014, the central bank's
action has pushed the currency down 1.6 percent. While that is
not a major move for many currencies, for the yuan it marked a
bigger slide than the currency posted over six months during the
Greek debt crisis in 2012.
In pushing the yuan lower, the risk was that traders bullish
on the yuan would see the weaker levels as a buying
However, foreign exchange traders said that the yuan
continued to fall in recent weeks and stay closer to the central
bank's midpoint, even though state-owned banks had stopped
intervening, indicating many bulls had been shaken out of the
A senior money manager for an international investment fund
in Shanghai, who spoke off the record because of the sensitivity
of relations with regulators, said that the wider trading band
would likely discourage foreign investors.
"It's what China needs to do, and the smart money says, OK,
this is great, this is two way, we'll have more money coming in
and out. But for the next tier of investor, they see China as
very hairy still, not a lot of transparency, and the only news
is bad news. They don't look at this as good news they just look
at it as more volatility."
Currency analysts said the shake out of bullish positions
cleared the way for the PBOC to widen the trading band without
worrying that the currency would immediately leap to test the
upper limits of the new range.
"Conditions for a band widening were ripe," said Li Heng,
economist at Minsheng Securities in Beijing.
Li Huiyong, an analyst at Shenyin Wanguo in Shanghai, said
that allowing the yuan to trade in a wider range each day and so
respond more to market forces would make the currency more
"China needs to internationalise the yuan and a 1 percent
fluctuation cannot adequately reflect market demand for and
supply of the yuan," said
Beijing wants to expand the Chinese currency's footprint
beyond Hong Kong, where more than 80 percent of yuan trade
settlement transactions are handled, and foster greater
confidence among offshore businesses to adopt the yuan, also
known as the renminbi, as a currency for trade.
Its efforts have paid dividends so far, with the yuan
already overtaking the euro to become the second-most used
currency in trade finance, data from global transaction services
organisation SWIFT showed.
The central bank's announcement follows rising concerns
about the implications of slowing growth in China, with some
warning that Beijing might have to ease up on the pace of
long-term structural market reforms aimed at migrating China to
a more sustainable model.
"That the central bank chose to widen the band right now
shows, in some ways, that it is confident about the economy,"
Shenyin Wanguo's Li said.
How the wider band will play into Beijing's efforts to
reduce debt and wasted investment while maintaining enough
growth to keep employment stable is an open question.
Although widening the trading band is aimed at introducing
more two-way price swings into the market, the last change in
April 2012 - doubling the band to 1 percent - largely failed to
Instead, the spot price consistently traded near its
strongest permissible level after briefly heading lower
following the band widening.
"The market will welcome the PBOC's move, but it will also
ask one question," said a trader at a European bank in Shanghai.
"The yuan's midpoint is now the base rate for the currency's
daily movements. That means if the PBOC sets the midpoint far
off from market rates, the market actually has no role in
deciding the yuan's exchange rate."