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China widens yuan’s daily trade limit against $ to cool economy

China widens yuan’s daily trade limit against $ to cool economy
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First Published: Fri, May 18 2007. 11 57 PM IST

Updated: Fri, May 18 2007. 11 57 PM IST
Beijing: China widened the yuan’s daily trading limit against the US dollar, allowing faster gains in the currency to cool the economy, and cut a record trade surplus that has strained ties with the US and Europe.
“Widening the band is to further improve the yuan’s mechanism, but it doesn’t mean the yuan will fluctuate by a lot or appreciate by a large magnitude,” the People’s Bank of China said in a statement in Beijing on 18 May.
The yuan will be allowed to move as much as 0.5% either side of a daily fixing rate against the dollar, up from 0.3%, the central bank said.
The People’s Bank of China also raised interest rates for a fourth time in the past year and ordered banks to put aside more money as reserves.
A stronger yuan will help temper an export-led expansion that has flooded the banking system with cash, raising concerns about a stock market bubble in the world’s fastest-growing major economy.
The announcement came before a 22-24 May meeting in Washington between Chinese vice-premier Wu Yi and US treasury secretary Henry Paulson to discuss reducing the trade imbalance.
“This is a very big move for China,” said Isaac Meng, a Beijing-based economist at BNP Paribas Peregrine Ltd. “This shows the government’s determination in addressing the fundamental structural problem with the Chinese economy of excess liquidity, caused by an inflexible currency.”
The one-year benchmark lending rate will be raised to the highest in more than eight years at 6.57% from 6.39%, starting on 19 May, the People’s Bank of China said on its Web site on 18 May. The one-year deposit rate will be increased to 3.06% from 2.79%.
The currency closed at the highest since China ended a link to the dollar in July 2005, rising 0.1% for the week to $7.6686 (Rs314) on Friday evening in Shanghai, according to the China Foreign Exchange Trade System.
The central bank has allowed the yuan to increase 7.9% since the end of the fixed exchange rate.
“This is China trying to show the US that China is willing and trying to act on the currency issue,” said Jeffrey Tan, a treasury dealer at Maybank, Shanghai.
The nation’s trade surplus, which ballooned 74% last year to a record $177.5 billion, drove foreign exchange reserves to an all-time high of $1.2 trillion, making it difficult for the government to slow growth.
Unfair advantage
US lawmakers and businesses say an artificially weak currency has given China an unfair trading advantage.
On 9 May, Democratic Representative John Dingell of Michigan, chairman of the House Energy and Commerce Committee, had said US Congress is “losing patience” with China’s exchange rate policy.
China needs to develop a more flexible exchange rate, the National Development and Reform Commission, the top planning agency, had said on 25 April. The central bank also said that it would keep improving its foreign exchange management.
“The move will increase the yuan’s flexibility and help companies become competitive,” the People’s Bank of China said in the statement.
China in July 2005 ended a decade-long link to the dollar, letting the yuan move in reference to a basket of currencies including the euro, yen, British pound and South Korean won.
Fund managers are heartened by China’s decision to widen the currency band and raise the interest rates and reserve requirement ratio. China’s benchmark CSI 300 Index, which tracks yuan-denominated A shares listed on the nation’s two exchanges, jumped 85% this year.
“I applaud these measures,” said Aaron Boesky, who manages $100 million, including Chinese shares, as chief executive officer at Marco Polo Investments Ltd in Hong Kong. The Chinese government “is doing the right thing. We don’t see a bubble” in China’s stock markets. “The market’s valuations are well-deserved,” he added.
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First Published: Fri, May 18 2007. 11 57 PM IST
More Topics: Money Matters | Currency |