Currency heads for quarterly fall against dollar.
The yuan edged lower against the dollar yesterday, increasing the prospect that it may post its first quarterly fall against the dollar since the fourth quarter of 2009, as the People's Bank of China (PBOC) tests the water for two-way trading of the Chinese currency.
Traders expect that the PBOC will permit more volatility for the yuan/dollar exchange rate in the second quarter as it takes advantage of China's slowing exports and a rare trade deficit in February to experiment with widening the trading range.
"It is now a golden time to test what the market thinks about the yuan's value," said a trader at a major Chinese commercial bank in Shenzhen. "I don't think China will continuously record trade surpluses in coming months."
Spot yuan was trading at 6.3103 versus the dollar at the mid-session break, slightly weaker than Thursday's close of 6.3060. The PBOC set its mid-point at 6.2943, weaker than Thursday's 6.2932, its third straight day of weak fixing.
Guidance from the midday exchange rate suggests the yuan is set to drop by 0.26 per cent against the dollar in the first quarter, but traders said there was still a possibility of the currency rising slightly in the afternoon session as the PBOC frequently tweaks the quarter-end exchange rate to make it more politically palatable to trading partners. Traders believe the yuan will remain largely stable in coming weeks, though the PBOC is expected to let the currency move in a wider range around the mid-point.
The mid-point fixing is the base rate used by the central bank to flag the government's intentions for the yuan's value, and from which the yuan is allowed rise or fall 0.5 per cent in either direction in the course of a day.
In the first half of March, the PBOC let the yuan's mid-point fixing weaken 0.70 per cent against the dollar, its biggest 11-session loss since the China Foreign Exchange Trade System, the domestic market, was set up in 1994.
Promoting greater flexibility
The PBOC has long hoped to promote greater two-way flexibility in the tightly-controlled yuan/dollar exchange rate, which has appreciated more than 30 per cent since July 2005 when Beijing conducted a landmark revaluation of the currency.
But the government finds it difficult to let the yuan pull back significantly without sparking protests from the United States, which continues to press China to allow its currency to appreciate to alleviate trade imbalances.