China: PBOC widens yuan trading band
March 13, 2014
On 15 March, the People Bank's of China announced that it will widen the yuan's trading band to +/-2 percentage points from the current +/-1 percentage points. The exchange rate is allowed to fluctuate around a daily midpoint fixing set by the PBOC. The last time the PBOC expanded the trading band was in April 2012 (from +/-0.5 percentage points to +/-1 percentage points). The widening of the trading band came as no major surprise to most analysts. The yuan has been depreciating steadily since mid-February which has fueled speculation that the Central Bank changed its policy of a steady pace of appreciation and that it could represent a preemptive move before a widening of the daily trading band. The PBOC claimed that its decision to push the yuan lower was partly intended to “punish speculators” who have been trying to benefit from its continued appreciation. Massive inflows of speculative capital have rendered the PBOC's task of conducting effective monetary policy increasingly difficult in the past months. The widening of the trading band represents another step towards a more market-determined exchange rate and most analysts do not expect the yuan to continue to depreciate. Wang Tao, Head of China Economic Research at UBS, says: We do not expect the CNY to depreciate in any meaningful way [...]. China still has a sizable current account surplus, net positive FDI inflows, and a large positive interest rate differential that continues to attract FX inflows [...].We expect the widening of the trading band to lead to increased two-way exchange rate volatility this coming year. FocusEconomics Consensus Forecast panelists expect the Chinese yuan to trade at 6.00 per USD by the end of this year. For 2015, the panel projects that the CNY will trade at 5.96 per USD.