First trading day smooth with wider band

Widening of the yuan's trading range against the U.S. dollar went smoothly on Monday, according to the China Foreign Exchange Trading System (CFETS).

The CFETS said the central parity of the renminbi, as the yuan is formally known, went up 25 basis points to 6.1321 against the U.S. dollar on Monday, while the spot market ended the trading day 460 basis points lower at 6.1781, down 0.75 percent.

The fluctuation, lower than the 2-percent limit, was in line with market expectation and signaled an increasingly stable currency market after the wider band, economists said.

The People's Bank of China (PBOC) announced on March 15 that it would widen the yuan's daily trading band from the current 1 percent to 2 percent from Monday.

Chinese banks can exchange the yuan in the foreign exchange spot market at 2 percent above or below the central parity against the U.S. dollar announced by the China Foreign Exchange Trading System each trading day, according to the PBoC's statement.

Ding Zhijie of the University of International Business and Economics, said that the first trading day was unproblematic and without drastic growths or declines.

The widened trading band was not necessarily followed by roller-coaster movement of the market exchange rate, said Zhao Qingming, a financial analyst.

Given the common daily variation of major currencies, an around 1-percent rise or decline was able to reflect normal demands, while change over 2 percent can be regarded as an extreme situation that may lead to instability of market sentiment.

According to Zhao, a more flexible currency could contribute to a stable foreign exchange market as operations would be more prudent and the inflow of hot money would be eased.

His remarks were echoed by Bank of Communication's researcher E Yongjian, who believed marked appreciation or depreciation of the yuan was unlikely after the PBoC's move, as the currency would continue the mild upward trend in the long term despite wider fluctuation expected.

Temporarily, however, the yuan would weaken moderately as a result of the country's economic downward pressure and the U.S. slowing its quantitative easing (QE) measures, E said.

China has adopted a steady pace in raising the yuan's daily trading limit, from 0.3 percent in 1994 to 0.5 percent in 2007 and 1 percent in 2012 to the latest 2 percent.

The widening of the band comes after continued yuan weakening against U.S.dollar from mid February to early March, causing widespread concern.