China doubling yuan band signals drive for convertibility

Increase to 1% from 0.5% takes effect on April 15

Yuan May Weaken

The yuan’s 31 percent advance in almost seven years makes it the third best of the most-traded Asian currencies tracked by Bloomberg, excluding the Japanese yen. The Brazilian real jumped 28 percent, while India’s rupee declined 16 percent and the Russian ruble dropped 3.3 percent.

Nobel laureate Joseph Stiglitz told reporters that the yuan may weaken as China takes steps to increase the ability of its investors to invest abroad.

“Opening up the band in conjunction with other actions they’ve taken may lead to a fall in the exchange rate rather than appreciation,” he said yesterday in Berlin, where he’s attending an economics conference. “To the extent they do open up, money may leave and that will weaken their currency. A free market exchange rate may not go in the way the U.S. thinks it should.”

Currency Flexibility

The central bank said the widening of the band is to meet “market demands,” promote price discovery, and enhance the currency’s two-way flexibility. The change improves a managed, floating exchange-rate regime that is based on supply and demand and operates in reference to a basket of currencies, it said.

The monetary authority will keep the currency “basically stable at an adaptive and equilibrium level,” to preserve the stability of the Chinese economy and financial markets, it said.

Twelve-month non-deliverable forwards for the yuan were 0.5 percent weaker than the onshore spot rate at the end of last week, according to data compiled by Bloomberg, suggesting that the currency could fall over that period. The yuan is already down 0.14 percent against the dollar this year.

“China will avoid significant appreciation or depreciation this year,” Lu Ting, an economist at Bank of America Corp. in Hong Kong, said after the announcement, citing reasons including an “uncertain” global economy.

Soft Landing

“It adds to my confidence in a soft landing,” Goldman Sachs Asset Management Chairman Jim O’Neill said in an e-mail. The change is positive for equities because it shows reformers are “in charge,” while “for FX it just means more volatility,” he said.

Cliff Tan, a currency analyst at Bank of Tokyo-Mitsubishi UFJ in Hong Kong, said yesterday he’s leaving unchanged a forecast for the yuan to reach 6.17 by the end of 2012.

The U.S. House of Representatives has yet to take up a bill passed on Oct. 11 by the Senate, which would allow sanctions on countries with so-called misaligned exchange rates. Treasury Secretary Timothy F. Geithner said on Jan. 27 that China’s currency is “still below almost all measures of fundamentals.”

Trade Deficit

The U.S. trade deficit with China rose 8 percent to $295 billion last year, fueling friction between the two nations.

Mitt Romney, the Massachusetts governor who is seeking nomination as the Republican presidential candidate to run against Democratic President Barack Obama, is committed to applying “strong and sustained pressure” on China to overhaul its trade and currency practices, according to a statement released today from his spokeswoman.

“Even as our trade deficit with China has grown each year, President Obama has made no progress confronting China on its wide range of unfair trade practices,” said Andrea Saul, Romney’s spokeswoman.

PBOC Governor Zhou Xiaochuan said March 12 that market forces are playing a greater part in determining the yuan’s value, which is also affected by the balance of payments. China may “appropriately” widen the trading band to better reflect market supply and demand, the official Xinhua News Agency reported Zhou as saying on March 5.

China will aim for a 7.5 percent economic expansion this year, having had an 8 percent goal in place since 2005, Premier Wen said on March 5. Growth slowed more than forecast last quarter to the least in almost three years, with the economy expanding 8.1 percent from a year earlier, a statistics bureau report showed last week.

Before yesterday’s announcement, views had varied on how far the central bank could or should expand the trading band.

One option is an increase to as much as 2 percent, China Business News reported on Dec. 9, citing Liu Yuhui, a researcher with the Chinese Academy of Social Sciences. A band of 0.7 percent or 0.75 percent would be appropriate, Li Daokui, then a central bank adviser, said March 6.

Bloomberg News

--Zheng Lifei and Fion Li, with assistance from Andrea Wong in Taipei, Lilian Karunungan in Singapore, Wenxin Fan in Shanghai and Simon Kennedy in Berlin. Editors: Paul Panckhurst, Jim McDonald, Ann Hughey.

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