China widens yuan daily trading band, targeting long-term dividends

China will widen the yuan's daily trading band from the current 1 percent to 2 percent starting next Monday, the country's central bank said Saturday. Starting March 17, Chinese banks can exchange the yuan in the foreign exchange spot market at 2 percent above or below the central parity against the U.S. dollar announced by the China Foreign Exchange Trading System each trading day, according to the statement from the People's Bank of China (PBoC). The move will enhance the floating flexibility of the renminbi exchange rate and improve the efficiency of capital allocation, facilitating economic restructuring and beefing up the decisive role of the market in allocating resources, the PBOC said in a statement on its website. China takes a gradual and steady pace in raising its currency's daily trading limit, from 0.3 percent in 1994 to 0.5 percent in 2007 and 1 percent in 2012 to the latest 2 percent. "The widening is within rational range and is a tentative step towards the liberalization of the yuan's exchange rate," said Yi Xianrong, a senior financial researcher with the Chinese Academy of Social Sciences. The widening of the band came after the Chinese yuan's continued weakening against U.S.dollar from mid February to early march, which caused widespread concerns over its domestic and international impacts to trade and the financial sector. The change will not lead to steep depreciation of the Chinese yuan, the statement said, citing improving balance of payments and rich foreign exchange deposit. "The recent fluctuation of the yuan's exchange rate prompted the expansion of its trading band," said Tan Yaling, president of the China Forex Investment Research Institute. "It will further drive away speculators betting on a one-way appreciation of the Chinese yuan thanks to the possible bigger and more frequent exchange rate fluctuations due to the widening," Tan said. The central bank respects the market rule and their reactions and maily focuses on mid-term changes of the yuan's exchange rate, Zhou Xiaochuan,governor of PBoC said last week during a press conference of China's annual parliamentary meetings. The change is expected to prompt enterprises and residents to pay more attention to the exhange rate's role in allocating market resources,according to the statement. "Enterprises may have a difficult time dealing with the change at the beginning as the fluctuation risk is left to the market instead of being taken care by the central bank," said Cao Honghui, a senior researcher with China Development Bank. They should learn to leave the comfort zone and grow more resilient to market risks, Cao said. Meanwhile, the change also calls for more diversified foreign exchange products to hedge against possible risks brought by more volatility in the yuan's exhange rate, Cao added. PBoC will further push the liberalization of yuan's exhange rate and diversify foreign exchange products to build a market-guided and properly regulated floating exchange rate system, the statement added. China reported a large trade deficit in February mainly due to distortion by the Chinese New Year holidays, marking the first deficit since April 2013, customs data showed last week. The next move should send a clear message to enterprises that there is no one-way appreciation and prompt them to adjust and reform themselves to deal with a market-based exchange rate, Yi said. Enterprises and financial institutions may go through some short-term pain dealing with more market risks, but they will gain in the long term with the gradual exchange rate liberalization due to enhanced global competitiveness, Yi added.