Tags: China | yuan | currency | band

Chinese Traders Skeptical Yuan Band Widening Imminent, Despite Comments

Friday, 19 Apr 2013 11:18 AM


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Comments by Chinese central bank officials this week have raised expectations internationally that authorities might soon widen the yuan's trading band, but domestic investors are skeptical any change is imminent.

They say signals in the domestic markets and coverage of the comments in Chinese language state media have both been muted, unlike the lead up to the last time authorities widened the currency's trading band in April last year.

"I think it's no more than rhetoric for foreigners," said a foreign exchange trader at a foreign bank in Shanghai. "We have not heard anything about a change coming."

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The yuan exchange rate is allowed to rise or fall by 1 percent in either direction from an official midpoint rate set by the People's Bank of China each morning.

A junior PBOC official was quoted in the official English-language China Daily on Wednesday saying that China remained committed to widening the band.

A day later, PBOC Deputy Governor Yi Gang said the band would be widened in "the near future" during comments at an International Monetary Fund panel in Washington.

The remarks sparked a flurry of expectations the central bank might give the exchange rate more room to rise or sink against the dollar on a given day.

UBS analysts Manik Narain and Geoffrey Yu in London said on Thursday that the central bank might widen the band within 72 hours to coincide with a Group of 20 meeting in Washington on Thursday and Friday.

"Signs are pretty clear that the PBOC is preparing a band widening very soon," they wrote in a research note.

"Chinese officials at the G-20 can present this step as further signs of them accepting a market-driven exchange rate, casting their own policies in a positive light as opposed to the controversies surrounding the activities of the (Bank of Japan)."

Skepticism on the part of Chinese traders comes in part because the comments were given negligible coverage in Chinese language state media.

The official Shanghai Securities News ran an article on page 3 on Friday discussing the comments, two days after they were made, but the headline said now was a good time to "consider" widening the trading band.

The official Xinhua news service covered Yi's comments but relegated them to a single paragraph at the bottom of an article.

"This is the way that China handles political pressure for the yuan to appreciate, this time before the G-20 meeting in Washington," said the trader at the Shanghai bank. "And it would be meaningless to widen the trading band even as the PBOC is still using the midpoint to virtually dictate the exchange rate."

When the PBOC widened the trading band in April 2012, it telegraphed the decision to the market through official statements by high level officials, including then-premier Wen Jiabao, in the Chinese-language official media and through adjustments in the daily midpoint setting, which traders saw at the time as creating room for more volatility.

At the same time, the currency market was in a far less excited state at that time than it has been this year, with the spot rate and the midpoint staying in close range of each other.

The political rhetoric this year has been more subdued and traders say there are few signs in its setting of the midpoint to suggest the PBOC is signaling a change anytime soon.

Instead, the central bank has been setting a series of record-high midpoints, allowing the currency to hit record intraday highs against the dollar in spot trading for four straight trading days through Wednesday.

Traders speculated the series of highs were designed for foreign consumption since they came as U.S. Secretary of State John Kerry visited China last week and ahead of this week's meetings of the IMF and G-20, where criticism China curbs the yuan's appreciation are often aired.

"We don't think that the widening of the band will happen very soon," said Patrick Wu, head of trading for China at J.P. Morgan Chase in Shanghai.

"The PBOC may have put this in the agenda, but in terms of when it will happen, we don't think it is likely in the next three months."

The spot rate has hovered near the strongest legally allowable value since September, showing that the central bank is effectively using the midpoint not as a market-driven reference rate but rather as a leash.

The result has been a gradual decline in the very two-way volatility a wider trading band was supposed to produce.

Editor's Note: This ‘Third War’ Will Be the Most Destructive in History, Warns Pentagon Adviser

© 2014 Thomson/Reuters. All rights reserved.

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