China Is Still A Long Way From 'Letting Go' Of Its Currency (FXI, EWH)
As of Monday, the yuan-dollar daily trading band has been widened to 2%, from 1%.
This move was widely expected, but it is nevertheless an important step towards internationalizing the renminbi and establishing a truly market-based exchange rate.
"The primary purpose is to disentangle monetary policy from FX policy," Societe Generale's Sebastien Galy wrote over the weekend.
While a lot of headlines have been focused on the band widening itself, the world is actually looking for a more meaningful reform out of China.
Societe Generale's Wei Yao writes that if China really means to "let go," it has to be be willing to relinquish control of its exchange rate.
"We think that, as the next move, the PBoC needs to be more elusive by moving to weekly or monthly setting of reference rates," she added. "Or at least, the trajectory of the daily reference rate should be less directional."
Bank of America's Ting Lu also thinks that any further band widening would be of little consequence, and that "a much more important and meaningful reform is to change the rule on setting the daily fixing of CNY/USD."
Ting expects China to eventually shift to a market-determined foreign exchange regime. "As an intermediate step, China could peg yuan to a basket of currencies weighted by the importance of its trading partners," he writes.
"More specifically, the Singapore’s BBC (Basket, Band and Crawl) regime seems to be favored," he noted. "A reform towards a real managed float such as the 'BBC' system requires a group of more confident and pragmatic political leaders who are true believers of markets."
Chinese policymakers are reform oriented when it comes to the economy and they have already got the ball rolling. It's unclear if the PBoC will move away from a daily to a weekly or monthly fix anytime soon.
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