Yuan flattens despite firmer fix, explores wider trading band

Written by Reuters | Updated: Apr 12 2014, 03:12am hrs
China's yuan held a flat tone for the week on Friday after the central bank set its guidance rate up 0.02 percent from Thursday's close, as markets digested economic policy statements from officials alongside uninspiring macroeconomic data. The People's Bank of China set the midpoint at 6.1495, slightly firmer than Thursday's setting of 6.1510, after the dollar index declined slightly in overnight trade. But the spot market priced the yuan slightly weaker at 6.2130 per dollar at midday, causing the traded rate spread to widen and letting the yuan explore the recently expanded trading band. For the first time it traded 1.03 percent away from the fix. Since mid-March the PBOC has allowed the spot price to trade 2 percent above or below the midpoint on a given day, up from 1 percent previously. But while the liberalisation has somewhat increased intraday volatility, the market has largely continued to price the yuan within the old 1 percent band, consistently weaker than the midpoint. The yuan has been weak in recent months for several reasons, first and foremost a dramatic downward plunge provoked by the central bank in February and early March, which has subsequently been reinforced by a second month of weak export data in March. However, some economists argued that the 12.4 percent nominal decline in March exports was distorted heavily by yuan speculation in the same month last year that saw export figures artificially inflated by fake or inflated trade invoices. "The disappointing March export data partly reflected the significant 'fake exports' phenomenon this time last year," wrote Cui Tiange of J.P. Morgan in a research note on Thursday. "Indeed, the discrepancy between China and Hong Kong trade figures, which was the major source of 'fake exports', spiked (and peaked) in March 2013." Cui and other economists argued that in fact China's March exports probably rose once speculative distortions are removed, but allowed that unexpected weakness in global demand did hit China in the first quarter. While the unstable policy and macroeconomic environment has kept traders cautious, most believe that long-term appreciation will resume in the second half as seasonal and base factors wear off and foreign money continues to flow in seeking relatively higher returns from Chinese assets. The onshore spot yuan market at a glance: Item Current Previous Change PBOC midpoint 6.1495 6.151 0.02% Spot yuan 6.213 6.2125 -0.01% Divergence from midpoint* 1.03% Spot change ytd -2.56% Spot change since 2005 revaluation 33.21% *Divergence of the dollar/yuan exchange rate. Negative number indicates that spot yuan is trading stronger than the midpoint. The People's Bank of China (PBOC) allows the exchange rate to rise or fall 1 percent from official midpoint rate it sets each morning. OFFSHORE CNH MARKET China will allow cross-border stock investment between Shanghai and Hong Kong, regulators said on Thursday, a small step towards opening the country's capital account and letting Chinese individuals buy foreign equities overseas. The news would potentially impact the supply of offshore yuan once the scheme is implemented in six months, but analysts believe the effect will be limited by the small size of the investment quotas for the programmes. Nearly one out of every five dollars that Hong Kong banks lend now find their way into non-banking entities on the mainland, a dramatic rise in the last few years, particularly after regulators unveiled the cross-border yuan trade settlement scheme in 2010. The proportion was tiny before that.