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China Widens Yuan Trading Band

(3/18/2014)

For the first time since April of 2012, China’s central bank has expanded the daily trading range of the yuan, allowing as much as 2% movement on either side of a per-day peg called the parity rate. The new band, announced on March 15, is double the size of the previous range the People’s Bank of China (PBOC) permitted in trading versus the U.S. dollar. The PBOC’s decision, long-awaited by analysts, follows a forced weakening of the yuan over the past two months, as Chinese central bankers moved to quash a run of speculative capital.

Following the range expansion, the U.S. dollar traded Monday at 6.1587 yuan – continuing a nearly 2% drop in China’s currency in 2014. This year’s depreciation comes after a stretch of greater value in 2013, when the yuan gained 3% against the dollar. Although traders still expect the yuan to steadily appreciate over the next few years, a weaker yuan in the short-term would be a modest benefit to industry suppliers who would pay less for certain Chinese-made products.

Despite the new trading range, the PBOC has repeatedly said it will not let the yuan float freely in the near future. As recently as Saturday, the central bank announced it will make “necessary adjustments” to maintain a generally stable exchange rate, arguing gradual shifts are key to the country’s monetary plan. Analysts believe China’s economy will consistently grow in coming years only if it’s driven by consumer spending rather than government-backed initiatives like infrastructure projects. A wider trading band for the yuan is a step closer to international currency competition – another important component for a maturing economy, analysts say.

Although it’s still growing, China’s economy has weakened early in 2014 as factory orders, in particular, have fallen below estimates. Officially, China’s leaders are forecasting a 7.5% expansion in the nation’s economy in 2014 – which would already be a 15-year low – but a consensus is forming among analysts that the growth number will actually be lower.



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