China needs to increase yuan flexibility
(Reuters)
Updated: 2006-07-10 10:49
China needs to widen the yuan's trading band and introduce more currency
derivatives to help firms hedge risk, a senior central bank official said in
remarks published on Monday.
Chinese firms had increased their ability to cope with the yuan's greater
flexibility since last July's landmark revaluation, Sun Gongsheng, head of the
central bank's Nanjing branch, wrote in an article published in the Financial
News.
Many firms had embraced nascent foreign exchange forwards and swaps to hedge
currency risk and some firms had adjusted their dollar debt holdings to minimise
potential losses, Sun said.
China revalued the yuan by 2.1 percent in July 2005 and changed its
decade-old dollar peg to a managed float with reference to a basket of
currencies.
The authorities needed to allow more currency derivatives, such as foreign
exchange options, and to increase the variety of forwards and swaps, to help
firms better hedge risk, Sun said.
"We should gradually increase the exchange rate's floating range in line with
economic and financial conditions to help reduce the public's expectations about
any imbalances in the exchange rate," Sun said.
Calls among economists to widen the yuan's tightly managed trading band, in
order to help tackle excessive liquidity, have been rising in recent weeks.
The yuan is allowed to move 0.3 percent each day up or down against the U.S.
dollar, although in practice it does not move nearly so far. So any widening of
the band might be merely symbolic, at least initially.
Chinese officials have pledged to gradually increase the yuan's flexibility
by making better use of its daily trading band rather than carrying out another
one-off revaluation.
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