* Move comes after PBOC governor vows wider trading band
* Slowing exports create conditions for two-way trading
* Trend for yuan to rise slowly still intact this year
* Yuan at 6.3239/dlr, up 7.9 pct since June 2010 de-peg
By Lu Jianxin and Gabriel Wildau
SHANGHAI, March 12 The People's Bank of
China's (PBOC) set its dollar/yuan midpoint sharply lower on
Monday, the second biggest single-day fall on record, in the
latest signal that China is willing to let its currency move in
a wider range.
The central bank has allowed the yuan to move in a
relatively wide range after PBOC governor Zhou Xiaochuan said
last week that conditions were now ripe for the yuan's exchange
rate to float more widely.
Last week, its midpoint dropped 0.41 percent from Monday to
Thursday, the biggest four-day fall since August 2010, then on
Friday it posted the biggest single-day rally in four months.
Traders and analysts said the PBOC is apparently using the
midpoint to widen the yuan's movements in either direction, a
move that will gradually prepare both the domestic and global
markets for sharper fluctuations of the Chinese currency.
But they said they do not expect the greater volatility will
automatically lead to yuan depreciation, adding that they still
expect the currency to firm over the year.
"The yuan appears to be ending its years of trend of
one-year appreciation and is set to fluctuate in either way from
now on," said Liu Dongliang, currency analyst at China Merchants
Bank in Shenzhen.
"This will force Chinese companies to gradually get used to
increasing exchange rate risk," he said. "But the trend for the
yuan to continue to appreciate slowly will continue this year."
The central bank set the yuan midpoint at 6.3282 to the
dollar on Monday, making the Chinese currency fall 209 pips or
0.33 percent from the previous day's fixing.
It was the second biggest daily fall in the midpoint since
China established its foreign exchange market in 1994. The
biggest single-day fall occurred on August 12, 2010, when the
yuan dropped 247 pips or 0.36 percent.
The yuan fell to 6.3239 against the dollar around midday,
down from Friday's close of 6.3107.
"It's not a direct response to the trade numbers as such,"
said Robert Minikin, senior foreign exchange strategist at
Standard Chartered in Hong Kong, referring to monthly trade data
at the weekend which showed that China posted its largest
monthly trade deficit in a decade. [ID: nL4E8EB030]
"It's simply a reflection of the fact that the authorities
want two-way variability, and they're prepared to adjust the fix
to reflect that," he said.
China has long stated its intention to promote greater
two-way flexibility in the tightly-controlled yuan, which has
appreciated more than 30 percent since July 2005, when Beijing
conducted a landmark revaluation of the currency.
Analysts say that the time is now ripe to widen the trading
band from the current 0.5 percent.
The seasonal pattern of weaker exports in the first half of
the year, combined with smaller cross-border capital flows
compared to last year, means that a widening band move would
likely not cause uncontrolled appreciation or excessive
volatility in the near term.
The yuan generally moves less than 0.2 percent a day, so the
immediate impact on the spot market of widening the trading band
would be limited. Its main significance would be to further
reinforce the signal sent by recent volatility in the midpoint.
Before it embarks on broadening the official trading band,
they said.The PBOC should first encourage the yuan to move more
widely both in intraday trading and with more volatile midpoints
from day to day, traders say.
The central bank has kept the yuan stable within a tight
range this year, in line with the government's policy to avoid
any negative impact from a volatile exchange rate on the
In the offshore non-deliverable forwards (NDF) market, the
benchmark one-year NDFs implied yuan appreciation
of 0.19 percent in afternoon trade, compared with 0.27 percent
they implied at Friday's close.