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China says will "strengthen" yuan's trading flexibility

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China says will "strengthen" yuan's trading flexibility

ReutersReuters – Sat, Nov 19, 2011

SHANGHAI (Reuters) - China will make the yuan more flexible in either direction and recent reforms to make the currency more market-oriented have begun to achieve some results, Premier Wen Jiabao said on Saturday.

The comments probably do not signal an imminent widening of the yuan's daily trading band, but they underscore Beijing's intention to introduce two-way fluctuations in the yuan to dampen expectations that China's currency could only appreciate.

Pointing to recent bets in overseas markets that had caused the yuan to hit the bottom end of its trading band a number of times, Wen said such fall in the yuan "could not have been engineered."

"China will continue to closely monitor the yuan's trading movements ... and will strengthen yuan's trading flexibility in either direction," the premier was quoted as saying in an evening news bulletin on state broadcaster CCTV.

Wen also told U.S. President Barack Obama that the trade imbalance between the two countries was a structural issue and that maintaining the healthy development of bilateral trade was essential for both countries and the world, according to the broadcast.

Wen's comments on the yuan were in line with recent central bank moves to encourage the yuan's value to fluctuate more widely within the daily trading band. The People's Bank of China (PBOC) allows the yuan to rise or fall 0.5 percent from its daily mid-point.

Some analysts and traders have argued that the central bank has been laying the groundwork for a widening of the trading band, which would allow China to say in the face of renewed U.S. pressure over the yuan that it is indeed moving ahead with reform to loosen its grip on the currency.

But other analysts believe that China will opt to widen the trading band only when upward pressures on the currency ease in line with a narrower trade surplus and lower capital inflows -- in other words, no time soon.

China's yuan currency -- also known as the renminbi -- has gained about 40 percent in real effective exchange terms since Beijing abandoned its peg to the U.S. dollar in 2005.

Chinese leaders have repeatedly rejected calls from the United States and other rich countries to allow faster yuan appreciation.

Analysts said China appears to have quietly adjusted its currency policy in response to the deepening euro zone debt crisis, slowing the yuan's steady appreciation while trying to nip speculation of yuan depreciation.

The balancing act comes as inflationary pressures come off the boil and economic growth slows in the world's second-largest economy, giving Beijing more room to fine-tune policy.

White House officials said earlier in the day that Obama reiterated currency concerns to Wen during the meeting, which was held on the sidelines of a regional summit in Indonesia.

(Reporting by Fayen Wong; Editing by Don Durfee)

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