Beijing keeps exchange rate frozen even while pledging more yuan volatility

Beijing keeps exchange rate frozen even while pledging more yuan volatility

Kim Kyung Hoon

SHANGHAI (Reuters) - Beijing may be struggling to put a floor under its tumbling stock market but it has managed to lock the yuan into an incredibly tight band against the dollar, despite pledging again to allow more exchange rate volatility.

The yuan has been stuck mainly in a 200-pip range since March, or just 0.3 percent from current rates, well inside its allowed trading range of 2 percent above or below the official daily fix.

Traders say state banks are selling dollars on behalf of the central bank as senior officials, including Premier Li Keqiang, have made it clear that China aims to keep the yuan stable.

The cabinet said last week that Beijing would allow the yuan to fluctuate more to support weak exports. Many economists took that as an intention it would widen the trading band, despite the vague wording being identical to language used before.

The trading band was last widened in March 2014 to allow a 4 percent daily fluctuation - wide enough by any international standards if the currency is actually allowed to move that much.

But the People's Bank of China (PBOC) wants a stable currency so that the market has more confidence in it, increasing the chances of the International Monetary Fund (IMF) including it in its Special Drawing Right (SDR) basket and eventually making it a global reserve currency.

On the other hand, if the yuan is not allowed to move at all, another widening of the trading band would be meaningless except as a symbolic gesture of reform, market players believe.

"A band widening is clearly possible, but in our view still less than a 50-percent probability this year," Goldman Sachs analysts Yu Song and Maggie Wei in Beijing said in a note.

GRADUALISM

Curbing the yuan also appears to be part of Beijing's efforts to put financial markets back on the leash because the economy is slowing, sparking worries of financial instability.

"The government will stick to gradualism," said Huang Yi, head of forex trading at China Guangfa Bank in Shanghai. "Sharply expanded volatility will only be a long-term target and there is no timetable for the full convertibility."

Looming higher interest rates in U.S. has made investors hold a rising dollar, exerting downward pressure on the yuan and prompting the PBOC to intervene to defend the currency, traders said. Trends in official reserves have supported this view.

Regulators have also launched large-scale rescue operations of the domestic equity market after its more than 30-percent slump in less than four weeks since June 12. [.SS]

"The stock market intervention has made many of us postpone the likely date for the yuan's full convertibility," said a dealer at a European bank in Shanghai.

"Plus intervention in the currency market, it appears that Beijing may think it needs more time than thought to make the economy more market-oriented."

The yuan has appreciated 33 percent since its landmark revaluation in July 2005, when Beijing also adopted a managed floating exchange regime.

It rose steadily from 2005 until early 2014, when the PBOC cracked down on speculators betting that it was a one-way ticket on appreciation and allowed more two-way moves.

Officials have repeatedly said the yuan is now at fair value - a stance largely acknowledged by the international community except some U.S. critics of Beijing's currency policy.

(Reporting by Lu Jianxin and Pete Sweeney; Editing by Nachum Kaplan & Kim Coghill)

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