China Widens Dollar Trading Band From 1% To 2%, Yuan Volatility Set To Spike
Submitted by Tyler Durden on 03/15/2014 10:09 -0400
In the aftermath in the recent surge in China's renminbi volatility which saw it plunge at the fastest pace in years, many, us included, suggested that the immediate next step in China's "fight with speculators" (not to mention the second biggest trade deficit in history), was for the PBOC to promptly widen the Yuan trading band, something it hasn't done since April 2012, with the stated objective of further liberalizing its monetary system and bringing the currency that much closer to being freely traded and market-set. Overnight it did just that, when it announced it would widen the Yuan's trading band against the dollar from 1% to 2%.
The healthy development of China's current foreign exchange market, trading body independent pricing and risk management capabilities continue to increase. To meet the requirements of market development, increase the intensity of market-determined exchange rate, and establish a market-based, managed floating exchange rate system, the People's Bank of China decided to expand the foreign exchange market, the floating range of the RMB against the U.S. dollar, is now on the relevant matters are announced as follows:Since March 17, 2014, inter-bank spot foreign exchange market trading price of the RMB against the U.S. dollar floating rate of expansion from 1% to 2%, or a daily inter-bank spot foreign exchange market trading price of the RMB against the U.S. dollar foreign exchange transactions in China can be Center announced the same day the central parity of RMB against the U.S. dollar and down 2% in the amplitude fluctuations. Designated foreign exchange banks to provide customers with the highest cash offer price of $ day of the minimum cash purchase price difference does not exceed the magnitude of the day the central parity rate expanded from 2% to 3%, other provisions remain in compliance, "the People's Bank of China on the interbank foreign exchange market Trading foreign exchange designated banks listed on the exchange rate and the exchange rate management issues related to notice "(Yin Fa  No. 325) execution.People's Bank of China will continue to improve the RMB exchange rate formation mechanism of the market, further develop the role of the market in the RMB exchange rate formation mechanism, strengthen two-way floating RMB exchange rate flexibility, to maintain the RMB exchange rate basically stable at an adaptive and equilibrium level.
Amusingly, we may have the first attempt at forward guidance by yet another central bank: that of China. As the WSJ explains: "There is no basis for big appreciation of the renminbi," the PBOC said, noting that China's trade surplus now represents only 2.1% of its gross domestic product. At the same time, "there is no basis for big depreciation of renminbi," the central bank added, saying that risks in China's financial system are "under control" and the country's big foreign-exchange reserves can serve as a big buffer against any external shocks.
Alas, in China merely soothing words hardly ever do the job which is why "while pledging to give the market a bigger role in setting the yuan's exchange rate, the PBOC said it would still implement "necessary adjustments" to prevent big, abnormal fluctuations in the yuan's exchange rate."
The macro thinking behind China's move was foretold well in advance, but for those who missed it, the WSJ does a good recap:
the change, which followed Beijing's landmark move in 2012 to double the yuan's trading bandwidth, is seen as an important step toward establishing a market-based exchange-rate system, whereby the yuan would move up and down just like any other major currency.The exchange-rate reform is part of China's plan to overhaul its creaky financial sector, elevate the country's status in the international monetary system and someday challenge the U.S. dollar as the de facto global currency.A freer yuan can also help China deflect foreign complaints about its currency policies. The U.S. and other advanced economies have pressed Beijing for years to relax its hold on the yuan and allow it to appreciate at a faster pace. The hope is to boost consumer demand in China as consumers in Western countries such as the U.S. and Europe pull back amid still-fragile economies.The move to widen the yuan's trading range comes as China's juggernaut economic machine is slowing down, leading to questions of whether leaders would continue to press ahead on fundamental economic change, or pull back to help struggling companies.
For some even the doubling in the rate band is not enough:
Widening the band would give a greater indication of how the market values the yuan. A prominent Chinese economist, Yu Yongding, for instance, advocates that the daily band be widened to 7.5% in either direction, which would essentially let the market fully determine the rate.
But perhaps the biggest message from today's announcement is that China is preparing to focus far more on its internal affairs rather than dealing with daily FX manipulation, as well as the micromanagement of China's reserves, which recently may or may not have been sold off in the form of US Treasurys.
Meanwhile, loosening its hold on the yuan can also help the PBOC focus more on domestic monetary policy while reducing the need for currency intervention by the central bank.That is because when the yuan's floating range gets bigger, the yuan won't touch the upper or lower limit of the band as frequently as it did in the past, thereby making it less necessary for the PBOC to meddle in the currency market in a bid to rein in or prop up the yuan's value.As a result, with the expanded trading band, the PBOC is expected to issue fewer yuan for the purpose of exchange-rate intervention, and that could leave the central bank with more room to manage the domestic monetary policy."The PBOC will still resort to intervention, but a wider trading band means that it may not need to intervene as readily as it did in the past," said Christy Tan, a currency specialist at Bank of America Merrill Lynch.
One thing is certain: as the world digests the latest out of the country that creates credit at a pace that is five times greater than the US, the volatility in the CNY will soar, at the worst possible time. Because as we explained before, all global specs, especially those out of Hong Kong need, is for the USDCNY to surge above 6.20 for the margin calls to start coming in fast and furious.
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Finally, here are some knee jerk reactions by Wall Street analysts, via Bloomberg.
- The action, coupled with more two- way volatility, could help discourage “hot money” inflows and encourage companies and banks to be more vigilant about exchange-rate risks, Wang Tao, chief China economist at UBS AG in Hong Kong, says in an e-mail.
- Action doesn’t have direct implications for direction of CNY against USD
- UBS still sees exchange rate “broadly unchanged, with increased two-way volatility”
- Action isn’t surprising because central bank has said for a while that it would widen band soon: Wang
- "We do not think the PBOC took this move to accelerate the CNY depreciation for mercantile interests to stabilize growth,” Morgan Stanley economist Helen Qiao says in e-mailed comment.
- Wider yuan band will help deter “carry trade speculators” as volatility increases
- Action is “largely in line with our expectation, as a major step in China’s FX reform” and is part of government’s “continued reform efforts”
- Recent CNY depreciation created precondition for band widening
Commonwealth Bank of Australia
- With PBOC dollar purchases being key driver in recent yuan weakness, it will be challenging for yuan to trade at both sides of the doubled trading band in a symmetric fashion, Andy Ji, FX strategist at Commonwealth Bank of Australia, says in email interview.
- Yuan is unlikely to depreciate substantially without PBOC intervention, given the status of current account surplus and without broad dollar strength
- Yuan may weaken in 1H then strengthen in 2H, similar to the patterns in past two years
- PBOC is likely to guide a weaker yuan through its daily reference rate to ensure there won’t be renewed one-way appreciation bets after doubling the trading band, Bank of East Asia FX analyst Kenix Lai says in phone interview today.
- Yuan band widening announcement shouldn’t be too surprising to market given the PBOC has already signaled such a move in Feb.
- Yuan should still be able to deliver mild appreciation in 2014 as China continues to push for yuan internationalization
Bank of America
- Weaker yuan fixings in past month or so has changed one-way appreciation bias, Albert Leung, BofAML local market strategist for Asia, says in email interview.
- PBOC wants to widen band when market view is more balanced
- Not very surprising in terms of band-widening timing
- Another band widening this year is unlikely
- Knee-jerk market reaction should be higher volatility, with higher NDF, DF implied rates
- Long-dated NDFs could weaken further, though not necessarily the daily official fixings
- Any follow-through after the knee-jerk and whether yuan will weaken further will highly depend on PBOC daily fixing and how macro data and corporate credit situation
- With the band widening and, more importantly, recent spate of weak China data, the bias is for near-term yuan weakness and potentially higher volatility, ANZ FX strategist Irene Cheung says in email interview today.
- Yuan band widening didn’t come as a surprise
- Band widening doesn’t necessarily relate to recent PBOC Governor Zhou Xiaochuan’s statement on interest rate liberalization
- Another widening won’t come so soon given the last move was 2 yrs ago in 2012
RMB could have bottom line of 6.2 against USD: expert
Nicolas Shamtanis, vice president of business development at Easy Forex predicts the bottom line for the position of the renminbi against the dollar will be 6.2 unless risks in China's economy result in a slowdown, Shanghai's China Business news reports.
An exodus of hot money from the market can be expected in the short term, Shamtanis said.
Since the beginning of this year, the renminbi has dropped about 1.5%, a temporary reversal of the upward trend seen over the past few years. In 2013, the renminbi posted a cumulative rise of up to 2.9% against the US currency.
An analyst at an international investment institution stated meanwhile that China's economy would be unable to tolerate a decline in the renminbi to below the 6.2 mark and suggested investors should bet on a rising renminbi. He further revealed that some offshore hedge funds mangers had begun placing bets on the renminbi's appreciation.
Sheng Hongqing, an analyst with China Everbright Bank, predicted that the renminbi would rise 8% to around 5.6 against the greenback over the next four years.
JP Morgan chief economist Bruce Kasman also agreed that a rising renminbi in the long-term is the mainstream view in the market.
Investors in the international commodity market are pessimistic about future movements of the renminbi, however, anticipating declining demand as China's rate of GDP growth slows.
Renminbi deposits in Taiwan reach record RMB247bn
Renminbi deposits in Taiwan's banking system reached 247 billion yuan (US$40.2 billion) as of the end of February, setting a new high, the Central Bank of the Republic of China (Taiwan) said Friday.
The RMB-denominated deposits in domestic banking units (DBUs) amounted to 192.5 billion yuan (US$31.30 billion) as of the end of February, while yuan deposits in offshore banking units (OBUs) reached 54.4 billion yuan (US$8.84 billion), the central bank said.
According to the central bank's January data, yuan-denominated deposits in DBUs accounted for 24% of Taiwan's foreign currency deposits, about the same percentage as in Hong Kong.
Market analysts said the significant amount of yuan deposits in Taiwan showed local investors' enthusiasm toward the Chinese currency as banks in the country have tended to offer higher interest rates on yuan deposits than on Taiwan dollar accounts.
Local investors have also preferred to hold yuan amid expectations of the currency's further appreciation against the US dollar.
Banks in China dent online funds by setting payment limits
China's leading banks such as Industrial and Commercial Bank of China, Agricultural Bank of China and China Construction Bank have recently imposed a daily limit of 5,000 yuan (US$815) on instant bank card payments and transfers which were previously unlimited, the Chinese-language Beijing News reports.
ICBC has lowered its limit on instant bank payments and transfers through PCs to 5,000 yuan per payment, with a daily limit of 20,000 yuan (US$3,250) and a monthly limit of 50,000 yuan (US$8,130), as well as cutting the limit on instant bank payments and transfers on wireless terminals to 5,000 yuan per transaction, 50,000 yuan per day, and 50,000 yuan per month. The bank previously had no limits on instant payments and transfers.
Agricultural Bank has set a limit of 10,000 yuan (US$1,625) for its instant payments and transfers, both per transaction and per day, compared with no restrictions previously.
At least a dozen banks have set limits on payments, citing security concerns, the report said.
Taiwan banks advised to conduct risk control amid RMB devaluation
Taiwan's financial regulator has said it will not set a cap on the amount of Chinese yuan deposits allowed to be held in the country, but has advised banks to do their best to conduct risk control.
Accumulated yuan deposits had increased to 214.5 billion yuan (US$34.92 billion) as of January, said Tseng Ming-chung, chairman of the Financial Supervisory Commission (FSC), at a hearing of the Legislature's Finance Committee Wednesday. "It's not much" compared with the 700-800 billion yuan (US$113-$130 billion) held in Hong Kong, Tseng noted.
However, banks should make efforts to carry out risk control because the FSC will not set a limit on the amount of yuan deposits they are allowed to hold, he said in an effort to soothe lawmakers' worries about a depreciating yuan.
On Wednesday, the reference rate for the yuan dropped by 0.16 percentage points from the previous day to 6.1343 against the US dollar, the lowest level this year, according to data released by the Shanghai-based China Foreign Exchange Trading System.
Standard Chartered chief economist Fu Ming-choi described the recent yuan depreciation as a short-term adjustment because the currency had experienced a long period of appreciation that began in 2005.
He said that in the long run, the yuan's value will not increase on a large scale, while the short-term fluctuations will also not affect the globalization process of the currency. The depreciation, however, has affected yuan buyers in Taiwan, dealers said, adding that the market at present is dominated by a wait-and-see attitude.
The market is uncertain whether the yuan has depreciated to its lowest point, the dealers said, attributing the recent drop to the US dollar's fluctuations and data on China's macro economic performance.
The restrictions have directly affected the money absorbing capabilities of Yu'ebao and other similar funds. In June 2013, Alipay and Tianhong Asset Management jointly introduced Yu'ebao as a way for individuals to manage excess funds in their Alipay accounts.
Affected by the banking restrictions on purchasing and falling yields, the growth of various fund products will likely slow. On Wednesday, of the more than ten financial fund products, only two have maintained a yield of above 6%, while others all fell to the 5% range.
Setting up such restrictions can be seen as a security measure by banks, given the risks of online wealth management and the threat of potential viruses, although the restrictions can also be seen as a way to prevent the loss of deposits to online wealth products, such as Yu'ebao, which have channeled a lot of deposits from banks, experts said.
In the first two months of this year, new deposits in banks were down 834 billion yuan (US$136 billion) from the same period a year earlier.