China’s central bank on Friday widened its daily trading band against the dollar for the renminbi to 0.5 per cent from 0.3 per cent, while raising interest rates and banks’ reserve requirements.
The widening of the trading band is sure to fuel expectations that China will allow the renminbi to rise at a faster rate as its politically sensitive trade surplus soars.
You were expecting the "however", weren't you?
However, People’s Bank of China insisted the move was just a further step in its gradual reform of its currency exchange regime and that it should not be seen as prelude to a revaluation.
"(The widening) is a constructive institutional step, and certainly does not signify that there will be great volatility in the renminbi exchange rate, even less does it signify that there will be a large appreciation,” the central bank said.
The track record suggests you should believe what they say, and some are of the opinion that this is a lot of not much. From the Wall Street Journal:
The band widening is a "symbolic but laudable" move that will help shift China's economy toward more domestic-led growth, said analysts at Goldman Sachs.
It "means nothing" for yuan appreciation, said a Shanghai-based trader with foreign bank. "We don't even use half of the current band. This is just to impress [U.S. Treasury Secretary] Henry Paulson."
Nonetheless, a report on the policy move from China Daily has a more urgent tone than usual:
... the tightening policies have largely failed to prevent the economy from becoming overheated. The gross domestic product grew 11.1 percent in the first quarter of the year, compared to last year at 10.7 percent, statistics showed.
Total value of the Chinese stocks hit 17.43 trillion yuan (US$2.27 trillion) yesterday and has likely surpassed the total in household deposits, as money continues to flow out of banks and into the stock market.
In April, total household renminbi deposits dropped to 17.37 trillion, a decrease of 167.4 billion yuan (US$21.7 billion) compared with March. Household deposits may drop further in May as investors are rushing to withdraw money from savings accounts and pump them into the stock market, the Shanghai Securities News reported.
It should be noted that, if the claim that the yuan remains undervalued is correct, demand pressures on the economy are inevitable. From macroblog past:
... abstracting from capital controls, theory would predict an undervalued currency is a problem that should eventually take care of itself. The reason is that pegging the nominal exchange rate -- the only currency price a central bank can hope to influence in the long run -- requires flooding the world with your domestic currency. Given enough time, the inflationary consequences of those policies will cause the fundamental value of the nominal exchange rate to fall on its own.
"Abstracting from capital controls" is not, of course, a phrase that ought to be used in discussions of Chinese financial markets. But the effects of mispricing have to show up somewhere, and it does appear that the yuan peg may have become a bit of a struggle.