Does PBOC Plan on Ratcheting the Yuan Band Wider?

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Sources cited by Reuters claim that the China’s central bank is mulling an expansion of the yuan’s trading range following the 19th National Congress of the Chinese Communist Party later this year.

According to Reuters People’s Bank of China hopes to shore up its credentials are a reform-oriented institution by implementing a token loosening of the yuan’s band of movement against the dollar.

Four sources have indicated that PBOC might expand the range within which the yuan is permitted to rise or fall against the dollar from the mid-point it sets on a daily basis from 2% at present to 3%.

The move would give Beijing a useful bargaining chip during trade negotiations with Washington, enabling them to point to move as a sign of greater exchange liberalisation.

At the same Beijing would still retain firm control of the yuan via capital controls as well as  the ability to determine at what level the yuan commences trading each day.

“The impact won’t be big – it may just be a gesture to express the commitment to long-term market reform,” said a source.

China watchers have long considered the central bank to be one of the most reform-oriented institutions in Beijing, with its leadership long pushing for greater liberalisation of the capital account and exchange rate.

PBOC has stepped up its push for greater liberalisation of the exchange rate during the past month, with its flagship publication The Financial News calling for a widening of the trade band.

The central bank has dramatically expanded the trading band for the yuan over the past decade, after first widening it to 0.5% from 0.3% in May 2007.

In April 2012 PBOC doubled the band to 1%, before doubling it once more to the current 2% in March 2014.

Even if PBOC succeeds in further liberalisation of the exchange rate, sources nonetheless expect Beijing to maintain its strong capital controls in the near-term in order to stabilise the yuan.

“We will not change the standard management measures on cross-border capital flows in the short term, especially at a time when the external picture is unclear,”  said a source close to PBOC.

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