* Weakness expected to persist in near term
* Central bank seeks to end one-way bets on currency
* Sharp decline unlikely given sizeable surplus, FX reserves
* Cbank likely to keep tight grip on mkt until nerves settle
By Lu Jianxin and Saikat Chatterjee
SHANGHAI/HONG KONG, March 17 China's yuan eased
against the dollar on Monday after the central bank doubled the
currency's daily trading band as part of its commitment to let
markets play a greater role in the economy.
Yet the currency moved in a relatively narrow range
reflecting market views that the People's Bank of China will
seek to limit currency swings at a time when markets fret over
China's cooling growth and the quality of corporate debt.
"The PBOC, with the help of major state-owned banks, will
for certain tighten the grip on yuan's value in coming days and
weeks to prevent what it sees excessive volatility," said a
dealer at a European bank in Shanghai.
In the longer run, however, the central bank is expected to
allow the currency to move in a broader range in a sign of its
confidence that it can keep speculators at bay and that the
economy was mature enough to handle greater uncertainty about
the exchange rate.
"Over time, the widening will pave the way for the PBOC to
gradually lessen intervention in daily trading and will help
China's reforms to make the yuan fully convertible eventually."
On Saturday, the People's Bank of China doubled the yuan's
daily trading range, so that it can now rise or fall 2 percent
around the daily mid-point rate. The currency opened at 6.15 to
the dollar, just 0.29 percent to the weaker side of
the official mid-point rate. It briefly fell to an intraday low
of 6.1642, 0.2 percent weaker than Friday's close.
Since the start of this year the yuan has lost 1.8 percent
against the dollar, largely as a result of the central bank's
efforts, reversing much of last year's near 3 percent rise as
Beijing sought to change the perception the yuan was a safe
one-way appreciation bet.
Beijing's efforts to clamp down on such trades combined with
concerns over China's economic health are expected to keep the
yuan on the back foot in coming weeks.
Earlier this month, a Chinese company became the first to
default on a corporate bond, and concerns about economic growth
were highlighted by a dramatic 18 percent fall in exports in
February and sluggish manufacturing.
"Given China's recent relatively weak export performance, we
see little upside for the yuan this coming year," said Tao Wang,
an economist at UBS in Hong Kong.
The Bank of International Settlements data underscore that
point showing the yuan at a record high against a basket of
currencies of China's trading partners adjusted for inflation.
Yuan non-deliverable forwards, that reflect bets on future
currency performance, are implying a nearly 1 percent drop over
the next 12 months compared with half a percent fall in
But China will be careful to temper expectations of more
yuan weakness to prevent capital outflows at a time when the
economy is facing headwinds.
A series of weak economic surveys made some economists
predict that Beijing will struggle to meet its 7.5 percent
growth target this year, which it itself would be already the
weakest in 24 years.
China's new leadership has signalled greater tolerance for
more pedestrian growth as the necessary price for its intended
rebalancing away from rapid investment- and export-driven
expansion towards more sustained development.
Giving markets more leeway in setting the exchange rate is
part of a broad reform plan that also includes freeing up
interest rates, allowing private investment in protected sectors
and cutting red tape. But Beijing has also made clear it was
ready to act if the economy lost traction too quickly to
preserve economic and social stability.
RENMINBI TO RISE
However, in the longer run, the yuan could still find
support in China's sizeable current account surplus and its
massive $3.8 trillion currency reserve war chest.
That also chimes in with Beijing's efforts to boost the
yuan's use in international trade. In recent months, it has
opened new offshore yuan hubs in London, Singapore and Taiwan
and relaxed restrictions for investors seeking yuan assets.
More than a sixth of China's trade is now denominated in the
yuan compared to less than 1 percent four years ago and analysts
expect this share to double over the next two to three years.
A band widening is also seen as a precursor to a fully
floating currency which would be a big step towards the yuan,
also referred to as renminbi, becoming an international reserve
"Any short term weakness that may occur would provide
investors a good opportunity to reallocate away from the
currencies of more indebted countries in favour of the
Renminbi," said Andy Seaman, fund manager at London-based fixed
income fund Stratton Street Capital.
Dealers said the central bank's mid-point level fixed 0.04
percent firmer than Friday's level and Monday's
opening trades suggested it was Beijing's intention to keep
markets guessing about where yuan would be heading.
"These rates are the first signs that the band widening may
not point to any certain direction of yuan depreciation or
appreciation," said a dealer at a Chinese commercial bank in
Reflecting that heightened uncertainty, one-month implied
dollar/yuan volatilities traded in the offshore
market, perhaps the clearest indicator of how volatile the
Chinese currency is expected to be over the next month, hit a
record before easing slightly.