Analysis: Window may be opening for China to widen yuan band

Tue Jan 10, 2012 2:11pm EST
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By Kevin Yao

BEIJING (Reuters) - China's policymakers might just have the wiggle room they need to deliver the more flexible currency they say they want.

The trade surplus is narrowing and an influx of hot money is on the retreat as the economy slows, easing fears among Chinese policymakers that the yuan could "overshoot," rising too fast or falling prey to speculators once they relax their grip on the currency.

The latest soundings from the central bank signal that conditions for flexibility might be ripening, with a long-anticipated widening of the yuan's current 0.5 percent daily trading band a possible first step.

"In the future, conditions for expanding the trading band will be relatively mature as capital inflows and outflows become more balanced," People's Bank of China Governor, Zhou Xiaochuan, told the official Xinhua news agency.

"The exchange rate floating band could be further expanded and this will be decided by the relationship between market supply and demand and transactions among market participants."

Zhou's comments are some of the clearest yet about current policy thinking and came late on Sunday after China's National Financial Work Conference, a once in five-year event that has previously reformed the central bank, created new regulators and set up the China Investment Corporation sovereign wealth fund.

"I reckon this is a signal," said Gao Shanwen, chief economist at China Essence Securities in Beijing, who believes the window for band widening is the first half of 2012.

"Easing pressures on the yuan will be favorable for widening the band. If the exchange rate is under one-way pressure to rise, it's difficult to widen the band," Gao told Reuters.   Continued...