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Economist: Widening Yuan Band Signals End of Steady Appreciation

04-16 15:09 Caijing
China has announced to double the yuan trading band to 1% beginning April 16th.

China has announced to double the yuan trading band to 1% on April 14th, a signal that the currency's steady appreciation is coming to an end, according to economists.

The yuan can move as much as 1 % against the dollar a so-called daily fixing rate, after the People’s Bank of China on April 14 announced the first widening of the band since 2007.

The central bank expanded the dollar/yuan trading band from 0.3%in 2007.

The move came amid softening expectations on a rising yuan after recent data showed that the country’s trade has become more balanced with decreasing current accounts and slowing capital inflows since the last quarter of 2011.

It is time for the central bank to establish a new exchange rate regime, since there's limited room for the appreciation of the yuan, said Lu Ting, China economist at Bank of America Merrill Lynch.

However, a sharp violation in both directions should be avoided, considering the political need of stability amid domestic leadership reshuffle and murky global environment, Lu added.

The yuan has depreciated 0.14 percent against the dollar so far this year, and accumulated a gain of 8.3 percent since it depegged its currency from the dollar in June 2010.

Wang Tao, an economist with United Bank of Switzerland (UBS AG) said he “expected increased two way volatility” in yuan trading this year, while predicting that the yuan will continue to appreciate against the dollar by 2-3 percent in 2012.

The widening of the band was a net positive for the economy, said Wang Tao, because greater currency flexibility increases “the independence of monetary policy.”

The central bank lowered the yuan’s central parity by 0.13 to reach 6.2960 on Monday, the lowest in three months against the dollar.

 

 

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