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Traders greet China's 'new' yuan with a yawn Add to ...

That’s not the way it was supposed to work.

On the first day of trading within the People’s Bank of China’s new 1 per cent band, the yuan declined 0.19 per cent to close at 6.3150 per dollar, the biggest drop in more than a week.

It’s a blow to those in the United States, Canada and elsewhere who argue that China’s exchange rate is kept artificially low. Chinese officials lately have argued the opposite, saying their currency’s 30 per cent appreciation over several years has found the yuan’s “equilibrium” value. The first day of trading supports the Chinese.

Traders had the opportunity to take the yuan higher than ever before, yet they sold, reflecting a certain uneasiness with the near-term prospects of emerging markets.

There are differing opinions over what to make of China’s move, announced late Friday. Some analysts went to work Monday with this message for their clients: Don’t believe the hype. “It is a ploy that would no doubt bring a smile to the face of Sun Tzu and Machiavelli,” the team at Brown Brothers Harriman wrote.

BBH points out that the yuan hadn’t been pushing the limits of the previous, narrower trading band, so the Chinese authorities aren’t really giving up anything by widening it. The BBH analysts, led by Marc Chandler, doubt the yuan’s value will change much in nominal terms, but will strengthen in real terms as higher inflation and wages erode China’s competitiveness. They say the change in the trading band was a political move, meant to put China’s critics on a back foot.

Beijing can now answer the G20 demand to “do something about your currency” with, “we have.”

There is something to the Sun Tzu take on China’s new currency policy.

The country’s leaders like to use announcements of this kind to get ahead of criticism, and they surely will be facing some at this weekend’s meetings of the Group of 20 and International Monetary Fund in Washington.

And it also is quite likely that the Chinese central bank chose to move now because demand for the currency has eased. But it might be too cynical to say the motivation is purely political. China has committed to make it’s currency fully convertible by 2015, and many say the government recognizes that the time has come to shift away from its current growth model of facilitating exports. A flexible exchange rate regime is coming to China, although at Chinese speed. A moment of relative calm in the global economy offers the right moment for the People’s Bank of China to experiment with its currency policy.

By lifting the band, it allows authorities to test the speculative pressure on the yuan. That fact that there appears to be little, or none, could engender confidence in Beijing to move forward with further reforms.

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Follow on Twitter: @CarmichaelKevin

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