China May Widen Yuan Trading Band in Second Quarter, UBS Says
March 31, 2010, 12:36 AM EDT
March 31 (Bloomberg) -- China may widen the yuan’s trading band against the dollar in the second quarter, allowing the currency to resume appreciation to help curb inflation, according to UBS AG.
The yuan may be allowed to move as much as 2 percent either side of a daily reference rate set by the central bank, up from 0.5 percent, said Wang Tao, an economist at Switzerland’s biggest bank. China has kept the yuan little changed at around 6.83 per dollar since July 2008 to shield exporters from the global recession and a contraction in world trade.
“The widening of the trading band is the most probable one among all the options China has to resume yuan appreciation,” Wang said today in a phone interview from Beijing. “A wider band would allow the yuan to better reflect market demand and supply. A one-time revaluation isn’t feasible because no one knows how much it should rise in one step.”
Twelve-month non-deliverable forwards for the yuan climbed 0.1 percent to 6.6610 per dollar as of 11:08 a.m. in Hong Kong, reflecting bets the currency will strengthen 2.5 percent from the spot rate of 6.8261, according to data compiled by Bloomberg.
Central bank Governor Zhou Xiaochuan said March 6 China will exit its crisis stance “sooner or later.” U.S. lawmakers have urged President Barack Obama to use the threat of trade sanctions to press China to end its currency peg. The Treasury Department is “seriously considering” labeling China a currency manipulator in an April 15 report, Senator Charles Schumer said on March 23.
‘Excess Liquidity’
To prevent the currency from strengthening the central bank has to keep purchasing dollars, boosting China’s foreign- exchange reserves, the world’s largest, to $2.4 trillion at the end of December. The monetary authority has twice this year ordered banks to set aside more funds as reserves in an effort to curb lending and tame inflation. Consumer prices climbed 2.7 percent in February, the biggest increase since October 2008.
“The rapid increase in foreign-exchange reserves forces the central bank to sell bills and raise reserve-requirement ratios to prevent excess liquidity,” Wang said.
Wang attended a meeting held by the central bank to discuss the exchange rate on March 24, Caijing Magazine said in a report published on March 29. The report said the government is considering adjusting its currency policy in April.
UBS predicts the yuan will strengthen to 6.4 per dollar by the end of this year. The People’s Bank of China last expanded the trading band on May 18, 2007, from 0.3 percent.
March 31, 2010, 12:36 AM EDT
March 31 (Bloomberg) -- China may widen the yuan’s trading band against the dollar in the second quarter, allowing the currency to resume appreciation to help curb inflation, according to UBS AG.
The yuan may be allowed to move as much as 2 percent either side of a daily reference rate set by the central bank, up from 0.5 percent, said Wang Tao, an economist at Switzerland’s biggest bank. China has kept the yuan little changed at around 6.83 per dollar since July 2008 to shield exporters from the global recession and a contraction in world trade.
“The widening of the trading band is the most probable one among all the options China has to resume yuan appreciation,” Wang said today in a phone interview from Beijing. “A wider band would allow the yuan to better reflect market demand and supply. A one-time revaluation isn’t feasible because no one knows how much it should rise in one step.”
Twelve-month non-deliverable forwards for the yuan climbed 0.1 percent to 6.6610 per dollar as of 11:08 a.m. in Hong Kong, reflecting bets the currency will strengthen 2.5 percent from the spot rate of 6.8261, according to data compiled by Bloomberg.
Central bank Governor Zhou Xiaochuan said March 6 China will exit its crisis stance “sooner or later.” U.S. lawmakers have urged President Barack Obama to use the threat of trade sanctions to press China to end its currency peg. The Treasury Department is “seriously considering” labeling China a currency manipulator in an April 15 report, Senator Charles Schumer said on March 23.
‘Excess Liquidity’
To prevent the currency from strengthening the central bank has to keep purchasing dollars, boosting China’s foreign- exchange reserves, the world’s largest, to $2.4 trillion at the end of December. The monetary authority has twice this year ordered banks to set aside more funds as reserves in an effort to curb lending and tame inflation. Consumer prices climbed 2.7 percent in February, the biggest increase since October 2008.
“The rapid increase in foreign-exchange reserves forces the central bank to sell bills and raise reserve-requirement ratios to prevent excess liquidity,” Wang said.
Wang attended a meeting held by the central bank to discuss the exchange rate on March 24, Caijing Magazine said in a report published on March 29. The report said the government is considering adjusting its currency policy in April.
UBS predicts the yuan will strengthen to 6.4 per dollar by the end of this year. The People’s Bank of China last expanded the trading band on May 18, 2007, from 0.3 percent.