China May Widen Yuan’s Trading Band to 3 Percent, Nomura Says

By Belinda Cao

Dec. 9 (Bloomberg) -- China may enlarge the yuan’s daily trading band against the dollar to 3 percent from 0.5 percent to boost flexibility in the exchange rate, according to a Nomura Holdings Inc. report.

The yuan fell by the daily limit of 0.5 percent from the central bank’s reference rate on Dec. 1 and closed 0.7 percent lower versus the dollar, both of which haven’t occurred since China ended a fixed rate to the U.S. currency in July 2005.

China may be about to change the band width to the same limits for the other currencies in the yuan’s trade-weighted basket, Sun Mingchun, a Hong Kong-based economist at Nomura Holdings, said in an interview today.

“The dollar will gradually lose its special position in China’s exchange rate managing practices,” said Sun. “The yuan’s decline against the dollar was needed to maintain relative stability versus the basket, as the dollar has strengthened versus other major currencies.”

The yuan rose 0.11 percent to 6.8725 per dollar as of 1:31 p.m. in Shanghai, a fifth day of gains, according to the China Foreign Exchange Trade System. The yuan closed at the low end of the daily limit in the first four trading days of last week.

China abandoned a decade-old peg of 8.3 to the dollar in 2005, allowing the currency to trade 0.3 percent on either side of the so-called parity rate set by the central bank. The band was widened to 0.5 percent in May 2007. The yuan is managed against a basket of currencies that also includes the euro, yen, South Korea’s won, Hong Kong’s dollar and the British pound.

Real Effective Rate

Nomura’s Sun said the yuan’s trade-weighted real effective rate gained 12.3 percent in the past four months, exceeding advances made in the two years through July, according to rates calculated by the Bank for International Settlements.

“Should the dollar start to fall versus other currencies, we’ll expect the yuan to go back on the course of appreciation,” he said.

The U.S. dollar has climbed 21 percent versus the euro in the past six months, 33 percent against the pound and 40 percent to the Korean won.

Sun is keeping his forecast for the yuan to appreciate to 6.55 per dollar by the end of 2009, stronger than the median estimate of 6.70 from 23 analysts and economists in a Bloomberg News survey.

“The central bank won’t intend to let the yuan weaken against the dollar as a trend, nonetheless, it will allow bigger drops amid greater two-way fluctuations,” Sun said.

To contact the reporter on this story: Belinda Cao in Beijing at lcao4@bloomberg.net