Reposted from CNN.com
Kevin Voigt | April 16h, 2012 | CNN.com
Hong Kong (CNN) – Over the weekend, China announced it was doubling the trading band of the yuan against the U.S. dollar.
The move was widely lauded as a step toward liberalizing the Chinese exchange rate and moving the yuan toward an internationally traded currency like the U.S. dollar, yen and euro.
“This underlines China’s commitment to rebalance its economy toward domestic consumption and allow market forces to play a greater role in determining the level of the exchange rate,” said Christine Lagarde, managing director of the International Monetary Fund, in a statement.
Beijing will still tightly control the movements of the currency, but now will allow the yuan to gain or lose as much as 1% in value each day – up from 0.5%. China began its crawling peg against the U.S. dollar in 2005, and the value of the yuan – or RMB – has risen by about 30% over the past seven years.
Others say Beijing’s weekend announcement is a canny political move aimed to undercut election year rhetoric against China. U.S. politicians have found rare bipartisan agreement in complaints against Beijing for not allowing market forces to control the rise and fall of the yuan – giving Chinese manufacturers an unfair advantage by keeping the currency undervalued. The political tensions surrounding currency rose when China stopped allowing its currency to rise in the wake of the 2008 financial crisis.
“It is ploy that would no doubt bring a smile to the face of Sun Tzu and Machiavelli,” wrote Marc Chandler, chief currency strategist at Brow Brothers Harriman, in a article for Seeking Alpha. “China is giving up something that it is not really using. Specifically, the current band itself has rarely if ever been utilized.
“It is no coincidence that the move is happening on the eve of the IMF/G20 meeting,” added Chandler, referring to the meetings set this week with the finance ministers and central bankers from the world’s top economies.
The U.S. isn’t alone in its recent criticism of Beijing’s tight control on yuan exchange rates. Fellow BRIC member Brazil has been vocal in its exchange rate concerns. Brazilian Finance Minister Guido Mantega coined the term “currency war” in 2010, hitting out at the monetary policies of both China and the U.S. for squeezing up the value of the real. Brazil’s currency woes continue, as Brazilian President Dilma Roussef pressed U.S. President Barack Obama for greater cooperation on global currency issues at a summit earlier this month.
For investors, Beijing’s move for a wider float range means less bets on the yuan trading in only one direction – up. “If they’re buying yuan with intention of speculating or in anticipation of the RMB continuously gaining value I’d say it’s a signal they should rethink their strategy,” Daniel Hui, senior FX strategist for HSBC, told CNN’s Ramy Inocencio.
“Chinese officials have indicated a fundamental shift behind the currency in which they believe the currency is now near fair valuation or near what they call equilibrium,” Hui said. “And that indicates they believe the currency has finished the large part of its adjustment of its strengthening against currencies in the world.”
HSBC is projecting “minimal appreciation – less than 2%” in yuan appreciation against the dollar, Hui said.