Yuan Rises to Highest Since July 2005 on Wider Trading Band

May 21 (Bloomberg) -- The yuan was little changed after the central bank said its decision to allow wider daily swings in the currency wasn't aimed at increasing the pace of gains.
The increase in the trading band to 0.5 percent from 0.3 percent ``doesn't mean the yuan will fluctuate by a lot or appreciate by a large magnitude,'' the People's Bank of China said in a statement in Beijing May 18. The decision suggests ``more goodwill'' rather than a promise to let the yuan rise by the maximum, said Philippe Gernez, regional head of currencies and derivatives at Natexis.
The yuan is trading at the highest since a dollar link was scrapped in July 2005 before Vice Premier Wu Yi meets U.S. Treasury Secretary Henry Paulson in Washington May 22-24. U.S. Senator Charles Schumer said China still faces ``strong'' legislation unless there is ``significant progress.'' A stronger yuan would increase export prices and lower import costs.
``China wants to show goodwill that it's letting the yuan appreciate faster, but will it fully utilize the band? I doubt it,'' said Singapore-based Gernez the French asset management and investment bank. ``I would expect the yuan to continue strengthening, but China wants to do it gradually.''
The Chinese currency gained as much as 0.09 percent to 7.6615 against the dollar before trading at 7.6641 at 11 a.m. in Shanghai. China has allowed the yuan to rise 8 percent since the central bank ended the fixed exchange rate to the dollar. It may rise 3 percent this year, Gernez said.
Nothing Will Happen
China's central bank also raised interest rates for a fourth time in the past year and ordered banks to put aside more money as reserves to help cool growth in the world's fastest-growing major economy and prevent the stock market from overheating.
``Widening the band is to further improve the yuan's mechanism,'' the People's Bank of China said in a statement in Beijing on May 18 after the market closed.
A stronger yuan may appease U.S. lawmakers who say China's currency policy and the U.S. trade deficit are costing American jobs. The U.S. on March 30 levied duties on imports of coated paper from China to compensate for Chinese subsidies to exporters.
``To widen the band is well and good, but if they don't use the band, nothing will happen,'' Schumer, a New York Democrat and member of the Senate Finance Committee, said after China's decision on May 18.
The yuan never moved the maximum permitted under the previous limit. It moved 0.13 percent from the daily reference rate on April 16, the most this year, according to Bloomberg data.
``This is a useful step toward greater flexibility and an eventual float of the currency,'' Brookly McLaughlin, a Treasury spokeswoman, said in an interview in Potsdam, Germany, on May 18. ``It's important now that Chinese authorities use the wider band and allow greater currency movement within each day and over time.''
Evolution not Revolution
The performance on the first trading day after China widened the yuan's band isn't surprising, said Adrian Foster, director of capital markets at Dresdner Kleinwort in Beijing.
``The history of policy changes coming out of China is more evolution than revolution,'' he said. ``I certainly wouldn't expect them to suddenly move it by half a percent, taking full advantage of the band.''
China's trade surplus, which ballooned 74 percent last year to a record $177.5 billion, drove foreign-exchange reserves to an all-time high of $1.2 trillion, making it difficult for the government to slow growth. The economy expanded 11.1 percent in the three months to March 31, exceeding 10 percent for a fifth quarter.
``There will definitely be dollar selling pressure against the yuan as the U.S. isn't ecstatic about the move,'' said Catherine Tan, head of emerging markets at Forecast Singapore Ltd. ``The market may test how far down they can push the dollar-yuan. As far as the U.S. is concerned, the dollar-yuan is stronger by 30 to 40 percent.''
The currency may strengthen to 7.51 in six months, Tan said.