China Doubles Yuan Band Signaling Move Toward Convertibility

From Bloomberg:

China's decision to widen the yuan’s trading band against the dollar for the first time since 2007 signals a drive toward a convertible currency that also saw overseas investors get bigger investment quotas this month.

The increase to 1 percent from 0.5 percent takes effect tomorrow, the People’s Bank of China said on its website yesterday. This month, regulators raised quotas for foreigners buying onshore stocks and bonds to $80 billion from $30 billion and increased the amount of yuan held offshore that can be invested locally.

Chinese officials pledged in a five-year plan running through 2015 to keep loosening controls on currency flows as Premier Wen Jiabao targets higher domestic consumption and an enlarged global role for the yuan that would curb the dollar’s dominance. Mizuho Securities Asia Ltd. said yesterday that moves including the increased investment quotas indicate that the government is stepping up the pace of its efforts.

“Greater two-way exchange rate risk makes possible capital account opening, which would be a logical next step,” said Tim Condon, chief Asia economist at ING Financial Markets in Singapore. “If so, we are in the early stage of what will be as momentous for China” as the nation joining the World Trade Organization in 2001, he said.

Trading Band
The previous broadening of the trading band, which is centered on a rate set daily by the central bank, was from 0.3 percent in May 2007. Gains in the currency against the dollar have stalled this year as China’s growth slows and officials say that the yuan may be near “equilibrium.”

“It’s a positive decision and one that the market has long waited for,” Helen Qiao, an economist at Morgan Stanley in Hong Kong, said yesterday. “But in the end, the most important thing to watch is how much of that band will actually be used.” ...MORE