Chinese Currency: More Fluctuations, More Volatility
March 21, 2014
Senior Vice President Foreign Exchange
China recently announced that it will double the permissible band
within which the Chinese yuan (CNY) can fluctuate from the daily fixing rate.
The timing of this announcement was a surprise and it was bold. But in the
overall scheme of things, it is perfectly in sync with China’s New Year’s
resolution to further deregulate its semi-fixed exchange rate system this year,
or more directly, fulfill its ambitions of making the CNY an internationally
There are several implications of this move:
- First, there will clearly be larger fluctuations and more volatility for the
CNY going forward. Ever since the People’s Bank of China (PBoC) hinted that the
CNY may deregulate further, the currency has seen 12 times more volatility.
Investors should realize that they have to start thinking about managing any CNY
exposure they have.
- Second, the CNY will no longer be a one-way bet. It was well-known that the
CNY was undervalued and so there was only a one-sided CNY appreciation
expectation in the market. The new, two-way flows will allow a more balanced
market expectation and hopefully an efficient allocation of capital.
- Finally, PBoC won’t need to intervene in the market as aggressively, which
means that it will buy less U.S. dollars (USD), EUROs (EUR) or U.S. Treasuries.
The more than $3 trillion in foreign exchange reserves held by China is said to
be primarily in USD but somewhat diversified into the EUR.
My View: Corporations that have exposures to China may start planning
to hedge their FX risks. City National Bank was one of the first banks in the
U.S. to offer offshore Chinese yuan (CNH) payments, deposits, and options to our
clients. We have dedicated China specialists. We look forward to helping you
find the right solutions for your firm.
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