By Lu Jianxin and Karen Yeung
SHANGHAI, July 21 (Reuters) - Spot yuan held steady against the dollar after its mid-point, or reference rate, was barely changed by the People's Bank of China on Wednesday, the fifth anniversary of Beijing's currency reform.
China stunned global markets with a landmark 2.1 percent yuan revaluation against the dollar on July 21, 2005, pledging the start of currency reform. It then revised the basic rules governing its foreign exchange system.
It shifted to 'a managed floating exchange rate based on market supply and demand with reference to a basket of currencies', replacing a single exchange rate system with the central bank announcing the yuan's value on a daily basis.
But the process was interrupted in July 2008 as China re-imposed the yuan's peg to the dollar to fight the global financial crisis. On June 19 this year, however, the PBOC announced a depegging and the resumption of the reform.
As Beijing had pledged reform in 2005 when it revalued the yuan, many Western critics have interpreted its most recent pledge to mean yuan appreciation.
But the trend over the past five years has proven to be more one of 'gradualism'.
China has introduced some yuan derivative products, launched a market maker system, kicked off over-the-counter trading and widened the yuan's trading range, among other things, but has avoided promising anything about changing the yuan's value.
'There are many misunderstandings on China's yuan policy,' said a senior trader at a major European bank in Shanghai.
'China has focused on improvement of yuan pricing mechanisms, having never promised any degree of appreciation, while Western critics see China's reform pledge amounting to appreciation.'
STABILITY
The PBOC set the yuan's mid-point at 6.7802 to the dollar on Wednesday, up marginally from Tuesday's 6.7812, guiding the yuan to trade at 6.7783 at midday, almost unchanged from Tuesday's close of 6.7781.
The yuan has generally traded weaker so far this week but traders said it was not a surprise. The PBOC made it clear, when it announced the depegging on June 19, that the yuan could move in either direction and would still be tightly controlled, with limited room for appreciation.
The central bank has since backed its words with deeds, using transactions by state-owned banks to adjust supply and demand for dollars on the Chinese foreign exchange market, giving it virtual control over the pace of yuan appreciation.
Four weeks into the depegging, the yuan has risen only 0.71 percent against the dollar but has mostly moved in daily ranges between 50 and 100 pips, up sharply from only a few pips per day during the two-year dollar peg.
Offshore, as the euro retreated from 10-week highs, benchmark one-year dollar/yuan non-deliverable forwards (NDFs) rose to 6.6850 bid at midday on Wednesday from Tuesday's close of 6.6753, pushing implied 12-month yuan appreciation down to 1.42 percent from 1.59 percent.
Among other factors influencing the NDFs, China tweaked rules on Monday to allow the sale of yuan-denominated financial products in Hong Kong, fuelling expectations that speculative offshore trade will temper over time..
Monday's new rules are among signs that China is continuing to push forward its currency reforms by quickening the pace of internationalising the yuan despite controlled appreciation.
China has also used yuan trade settlement as a starting point to gradually internationalise the currency. The PBOC recently said it was extending the yuan trade settlement scheme to all overseas nations and regions.
(Editing by Jacqueline Wong)
((jianxin.lu@thomsonreuters.com; +86 21 6104 1792; Reuters Messaging: jianxin.lu.reuters.com@reuters.net)) Keywords: MARKETS CHINA YUAN MIDDAY (If you have a query or comment on this story, send an email to news.feedback.asia@thomsonreuters.com) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.
SHANGHAI, July 21 (Reuters) - Spot yuan held steady against the dollar after its mid-point, or reference rate, was barely changed by the People's Bank of China on Wednesday, the fifth anniversary of Beijing's currency reform.
China stunned global markets with a landmark 2.1 percent yuan revaluation against the dollar on July 21, 2005, pledging the start of currency reform. It then revised the basic rules governing its foreign exchange system.
It shifted to 'a managed floating exchange rate based on market supply and demand with reference to a basket of currencies', replacing a single exchange rate system with the central bank announcing the yuan's value on a daily basis.
But the process was interrupted in July 2008 as China re-imposed the yuan's peg to the dollar to fight the global financial crisis. On June 19 this year, however, the PBOC announced a depegging and the resumption of the reform.
As Beijing had pledged reform in 2005 when it revalued the yuan, many Western critics have interpreted its most recent pledge to mean yuan appreciation.
But the trend over the past five years has proven to be more one of 'gradualism'.
China has introduced some yuan derivative products, launched a market maker system, kicked off over-the-counter trading and widened the yuan's trading range, among other things, but has avoided promising anything about changing the yuan's value.
'There are many misunderstandings on China's yuan policy,' said a senior trader at a major European bank in Shanghai.
'China has focused on improvement of yuan pricing mechanisms, having never promised any degree of appreciation, while Western critics see China's reform pledge amounting to appreciation.'
STABILITY
The PBOC set the yuan's mid-point at 6.7802 to the dollar on Wednesday, up marginally from Tuesday's 6.7812, guiding the yuan to trade at 6.7783 at midday, almost unchanged from Tuesday's close of 6.7781.
The yuan has generally traded weaker so far this week but traders said it was not a surprise. The PBOC made it clear, when it announced the depegging on June 19, that the yuan could move in either direction and would still be tightly controlled, with limited room for appreciation.
The central bank has since backed its words with deeds, using transactions by state-owned banks to adjust supply and demand for dollars on the Chinese foreign exchange market, giving it virtual control over the pace of yuan appreciation.
Four weeks into the depegging, the yuan has risen only 0.71 percent against the dollar but has mostly moved in daily ranges between 50 and 100 pips, up sharply from only a few pips per day during the two-year dollar peg.
Offshore, as the euro retreated from 10-week highs, benchmark one-year dollar/yuan non-deliverable forwards (NDFs) rose to 6.6850 bid at midday on Wednesday from Tuesday's close of 6.6753, pushing implied 12-month yuan appreciation down to 1.42 percent from 1.59 percent.
Among other factors influencing the NDFs, China tweaked rules on Monday to allow the sale of yuan-denominated financial products in Hong Kong, fuelling expectations that speculative offshore trade will temper over time..
Monday's new rules are among signs that China is continuing to push forward its currency reforms by quickening the pace of internationalising the yuan despite controlled appreciation.
China has also used yuan trade settlement as a starting point to gradually internationalise the currency. The PBOC recently said it was extending the yuan trade settlement scheme to all overseas nations and regions.
(Editing by Jacqueline Wong)
((jianxin.lu@thomsonreuters.com; +86 21 6104 1792; Reuters Messaging: jianxin.lu.reuters.com@reuters.net)) Keywords: MARKETS CHINA YUAN MIDDAY (If you have a query or comment on this story, send an email to news.feedback.asia@thomsonreuters.com) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.