China’s red tape reduction could lead to wider CNY trade band

Market participants believe China could widen the renminbi trading band by the end of the year, as the Chinese government steps up its efforts to liberalise investment in the country and international trading in its currency.

“While any change is difficult to predict, as long as the Chinese government is comfortable and in control, it will widen the band and increase the liberalisation process. It’s more than a year since it last widened the band, so it should have more experience in operating with a more liberalised exchange rate,” says Janet Ming, head of the China desk at Royal Bank of Scotland in London.

Last week, China’s State Administration of Foreign Exchange (Safe) announced it would simplify regulation of foreign currency transactions for companies operating in China’s special economic zones. Earlier, on May 10, Safe stated its intention to reduce the country’s foreign direct investment (FDI) rules, saying it plans to abolish several regulations regarding foreign exchange registration, accounts, remittance and conversions.

Ming says this will reduce Safe’s role in FDI approval, giving investors more flexibility and control with regards to their operations, and should accelerate the FDI process in China. The resulting increase in renminbi flows could lead to a widening of the currency’s imposed trading range by year-end, she says. The band was widened for the first time in five years last April, when it was doubled to 1%.

Barney Singer, head of emerging markets forex trading at Nomura in London, agrees Beijing’s efforts to simplify investment in the country are the next step towards liberalisation, and says the measures are partly in response to exporters overstating their receivables in China.

“These measures are a way of making sure there is no overstatement of exports, and of preventing speculation on renminbi. Combined with other measures that allow for greater movement of capital into and outside of China, this is a tool to slowly but surely liberalise the currency,” he says.

The Chinese government has introduced a number of initiatives to internationalise the renminbi in recent months, signing a bilateral currency swap agreement with the Bank of England, approving direct trading between the yuan and the Australian dollar, and doubling the size of its swap facility with Singapore to 300 billion yuan.

Its efforts are paying off, according to industry messaging body Swift, which last week announced there has been a 9% increase in the number of countries using renminbi for their payments with China and Hong Kong since July 2012.

“The big increase in countries with substantial renminbi volumes is a good indicator the currency has become more internationalised,” says Lisa O’Connor, director of renminbi at Swift.

But despite these positive developments, not all concur China will widen the renminbi’s trading range any time soon.

“Looking at USD/CNY onshore over the past six months, it has traded close to the bottom of the band more often than not. China will not widen any band until it feels comfortable USD/CNY is trading consistently nearer to the centre of the existing 1% limit. Instead, it is allowing more renminbi flows, including FDI, to affect the fix rate set at the start of the trading day, meaning renminbi can appreciate as any other currency would,” says David Pavitt, head of emerging markets FX trading at HSBC in London.


This article was first published on Risk

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