China's attack on yuan speculators risks backfiring

Wed Feb 26, 2014 5:58am EST
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By Pete Sweeney and Kevin Yao

SHANGHAI/BEIJING (Reuters) - China's central bank rattled speculators this week by engineering a sudden fall in the yuan against the dollar, but economists warn that induced downside risk was no substitute for true liberalization in the currency market.

Unless the central bank takes bolder steps toward allowing the market to determine the exchange rate, traders believe the correction could do little more than present speculators with a fresh buying opportunity.

Beijing has committed to letting the market determine the yuan's true value, part of a wider project to encourage international usage of the currency to rival the dollar.

The yuan's orchestrated reversal also has unleashed speculation that the central bank is preparing to widen the currency's daily trading band, currently set at 1 percent either side of a daily midpoint fixed by central bank.

But even if the band is widened, traders doubt whether it can hold the yuan back from strengthening further, given the enduring ability of Chinese assets to attract capital inflows.

Since January 13, the spot yuan has undergone an unprecedented fall of more than 1.5 percent, guided downward by the central bank with the help of major state-owned banks, which traders say were selling off yuan at the central bank's behest.

Wang Jun, senior economist at the China Centre for International Economic Exchanges (CCIEE), a well-connected think-tank in Beijing, told Reuters that the central bank had to deliver a clear message to speculators.

"It needs to tell the market, 'No more one-way rise for the yuan,' and introduce two-way fluctuations in the rate like other major currencies have," Wang said.   Continued...

Chinese banknotes are seen at a vendor's cash box at a market in Beijing February 14, 2014. REUTERS/Kim Kyung-Hoon