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POLITICAL ECONOMY
China's politically-sensitive yuan falls after reform
by Staff Writers
Shanghai (AFP) March 17, 2014


China's yuan weakened against the dollar on Monday after the central bank doubled the trading band for the currency, which the United States has long insisted is undervalued.

The People's Bank of China (PBoC) said Saturday it would allow the yuan to move up or down two percent daily -- double the previous one percent -- on either side of a mid-point set under the guidance of the bank, which says it polls market makers.

The yuan ended at 6.1780 to the dollar on Monday, the first trading day after the reform, compared with Friday's close of 6.1502, according to the China Foreign Exchange Trade System.

Analysts said the long-waited financial reform would introduce greater volatility in trading on the national foreign exchange market, but stressed the central bank could still exercise control over the yuan.

Policymakers have pledged to move gradually towards full convertibility of the yuan -- also known as the renminbi -- allowing it to be freely bought and sold, and bringing with it the uncontrolled movement of funds in and out of China.

The US government said in October that the yuan remained undervalued despite appreciating last year and called on Beijing to disclose more about its market intervention.

But the US Treasury stopped short of officially branding China a "currency manipulator", a designation that could spark sanctions by Washington.

The yuan steadily appreciated against the dollar in 2013, rising more than three percent.

"We view this move as another major step in the direction of allowing the market to play a more important role in exchange rate setting," investment bank Goldman Sachs said in research note released Monday.

But it added: "If the PBoC wish they can still move the rate in the direction they want, since this band only affects how much (the) rate can move intra-day."

- Sudden depreciation -

China keeps a tight grip on its capital account -- investment and financial transactions, rather than those related to trade -- on worries that unpredictable flows of funds could harm the economy and reduce its control over it.

Beijing has widened the trading band previously, most recently moving from 0.5 percent to one percent in 2012. But the latest move comes under the new leadership after a decade-long period when financial reforms largely slowed.

"Increasing the flexibility of the exchange rate has been a long-term objective oft stated by the government... So much so that the market has been somewhat disappointed that this did not occur in 2013," said Wang Tao, head of China economic research for investment bank UBS.

Last month, the yuan suddenly reversed course, at one point closing at an eight-month low, in what dealers believed to be a deliberate move by the central bank to target speculative funds betting on continued rises and prepare for widening the trading band.

"Now, it is even clearer that the purpose of the depreciation was mostly intended to prepare the market for two-way volatility," Societe Generale Group's China economist Yao Wei said.

Major currencies and even key emerging market units do not usually move more than the four percent maximum intraday change now allowed for the yuan, she added.

Analysts expect the Chinese unit to be slightly weaker to stable this week after the move but some forecast it could still eventually move higher.

"Fundamentals still point to a stronger currency over the medium term," Capital Economics chief Asia economist Mark Williams said.

"Greater volatility is likely over the months ahead, but as a result of official intervention not market forces," he said.

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