Banking & Finance

Elastic band

Currency reform surprise

Elastic band

“Get ready for more fireworks,” was how HSBC’s Qu Hongbin described the announcement.

The bank’s Greater China chief economist was referring to the decision this week to widen the daily trading band of the renminbi against the US dollar. As of Monday, Chinese authorities allowed the yuan to rise or fall 1% within its trading band each day, versus the previous 0.5% limit.

The South China Morning Post reckoned the reform “paves the way for a freely convertible currency”. It quoted Dai Xianglong, the chairman of China’s National Social Security Fund, who said at the Boao Forum two weeks ago “that the central government preferred market forces to drive yuan reform, and that now the time is ripe to push forward and make it an international currency for investments, reserves and trade settlement.”

The move marks another tangible sign that the market reform faction is in the ascendant within governing circles. It’s a theme WiC has been discussing extensively (see issues 136 and 140, for example).

HSBC’s Qu accordingly predicts more activity in deregulating the capital account, as well as in internationalising the renminbi and boosting the domestic bond market (for news on bank lending reforms, see WiC145 for our article on the pilot programme launched in Wenzhou).

It is the first time that the yuan’s trading band has been widened in five years.

Qu believes the move towards a more flexible, market-set rate means that the one-way bet on the currency appreciating against the dollar could also be over. Indeed on the first day in which the yuan traded within its wider band, it dipped versus the dollar.

SCMP columnist Tom Holland meanwhile highlighted that the timing of the move was particularly astute. “Coming before the IMF and World Bank meetings, the reform will help silence critics of China’s exchange rate policy,” Holland surmised.

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