China Widens Yuan's Euro, Yen Band; Keeps Dollar Rate

China Widens Yuan's Euro, Yen Band; Keeps Dollar Rate
 
Sept. 23 China widened the yuan's daily trading band against the
euro and yen, stopping short of meeting calls from the U.S. that the
currency be allowed to strengthen more against the dollar.
The yuan will be allowed to move as much as 3 percent from a daily
fixed rate against the euro, yen and other currencies except the
dollar, the People's Bank of China said in a statement as finance
ministers from the Group of Seven gathered in Washington. The band
against the dollar, which accounts for almost all of yuan trading,
was kept at 0.3 percent.
``It's a political move,'' said Neil Jones, a director of foreign-
exchange sales at BNP Paribas SA in London. ``The main objective of
most of the West is to get a revaluation against the dollar, and
this obviously doesn't meet that need.''
China, which in July abandoned a decade-old peg to the dollar in the
face of criticism from trading partners, is still being pressed by
the U.S., Japan and Europe to let the yuan appreciate further.
Japanese vice-finance minister Hiroshi Watanabe said last month
China has been ``cautious'' in managing its currency after scrapping
the peg.
The yuan has gained 0.2 percent against the dollar since China
revalued it by 2.1 percent on July 21 and began managing it against
a basket of currencies. The biggest one-day change since the new
system was introduced is less than 0.1 percent.
China's currency weakened 0.04 percent today to 8.0910 per dollar.
The announcement came after the close of trading.
`Red Herring'
The yen surrendered gains made in the minutes after the People's
Bank of China announcement. Japan's currency rose to 111.46 at 8
a.m. in New York from 111.71 late yesterday. It gained to as much as
111.05 before retreating. The yen rose to 135.09 per euro from
135.79.
``It is largely a red herring in terms of relevance to the market,''
said James Malcolm, a currency strategist at Deutsche Bank AG in
Singapore. ``People saw the headline and thought China is widening
the trading band full stop.''
Daily average trading in the yuan rose to $1.8 billion last year, up
530 percent from 2001, the Bank for International Settlements
estimates. At least 95 percent of that reflects trading in the
dollar versus the yuan, said Tony Norfield, head of global currency
research at ABN Amro Holding NV in London.
Bonds Decline
Treasuries and European bonds declined on speculation that a more
flexible yuan will mean a reduced appetite by the Chinese government
for foreign debt. Chinese investors, including the central bank, are
the second-biggest foreign holders of Treasury notes. The euro fell
against the dollar.
A wider trading band means China will be ``less present in the
market buying Treasuries, and that's obviously a concern for the
market,'' said Andrew Popper, who oversees $9.2 billion in assets as
chief investment officer of SG Hambros Bank in London.
Lawmakers and manufacturers in the U.S. and European Union, China's
two biggest overseas markets, say Chinese exporters benefit from an
artificially weak currency. China's trade surplus for the first
eight months of the year was $60.2 billion, nearly double the $32
billion reported for the whole of 2004, according to the nation's
customs bureau.
``It will be a good number of years before China allows a free
floating currency,'' said Jim O'Neill, head of global markets
research at Goldman Sachs Group Inc. ``We'll see a variety of steps
like this, but we will see occasional revaluations of the yuan along
the way, which we will get more of, possibly more before the end of
the year.''
Developing Market
Since revaluing the yuan in July, China has taken a series of steps
to develop its foreign-exchange market, easing limits on how much
overseas currency banks can hold, increasing the amount of yuan
individuals can sell when traveling and letting banks trade yuan
forward contracts.
Today's ``change will allow banks more freedom to set prices and
manage foreign-currency risk,'' the central bank said in a statement
on its Web site. ``It will also improve the central bank's
management of the yuan exchange rate with reference to the basket of
currencies.''
The central bank also eased restrictions on the buy and sell rates
banks may quote to clients. The maximum bid-ask spread for overseas
wire transfers involving the U.S. dollar was widened to 1 percent,
from 0.2 percent, the statement said.
Banks may quote a bid-ask spread of as much as 4 percent for U.S.
dollar cash exchanges, from 1 percent. Restrictions on bid- ask
spreads for other currencies were scrapped.
`Very Gradual'
Forwards are agreements in which assets are bought and sold at
current prices for delivery at a later specified time and date. They
will allow local companies and investors to protect themselves from
swings in the yuan and other currencies.
``We expect in terms of the yuan spot rate, a very, very gradual
process of appreciation, which on the present trend line would take
us to about 8.05 by year-end,'' said Uwe Parpart, senior market
strategist in Hong Kong at Bank of America Corp. ``It depends on how
much pressure they're going to get from the U.S. Congress.''
The central bank said on Sept. 19 in its quarterly monetary policy
report that it will maintain the ``basic stability of the yuan at a
reasonable and balanced level.'' The central bank has been
performing open market operations to prevent ``excessive
fluctuation,'' assistant central bank governor Ma Delun said Sept.
9.
Senators Charles Schumer and Senator Lindsey Graham, co- sponsors of
legislation to impose a 27.5 percent tariff on Chinese imports, said
Sept. 4 they will renew efforts to push the bill through the Senate
unless President Hu Jintao does more to boost the currency's value.
U.S. Trade Deficit
The Manufacturers Alliance, which represents some of the largest
U.S. companies including Alcoa Inc., said Aug. 31 that China's
currency is still undervalued by more than 50 percent. The U.S.
trade deficit with China widened to $90 billion in the first half
from $68 billion a year ago, according to U.S. data.
China, whose economy grew 9.5 percent in the second quarter from a
year earlier, is now the world's biggest producer of mobile phones,
laptop computers and printers after companies including Quanta
Computer Inc. and Motorola Inc., two of the nation's four biggest
exporters last year, expanded production to take advantage of low
labor costs.
Foreign-invested companies accounted for 57 percent of the nation's
exports in the first half, the commerce ministry said Aug. 2.