China’s Yuan Move Adds Risk for Companies in West

China’s broadening the currency band “should introduce more volatility,” an economist says.
Andrew SawersApril 24, 2012

Companies should change the way they think about the Chinese currency in the wake of the decision by that country’s central bank to allow a wider trading band for the yuan against the U.S. dollar, a leading economist says.

On April 16, the People’s Bank of China widened the band to plus or minus 1% a day, up from 0.5%. Gerard Lyons, chief economist of Standard Chartered, told CFO European Briefing that the move was not unexpected, as it had been flagged by the authorities for some time. China, however, wanted to “change the mentality regarding the currency” so that it was not perceived as “a one-way bet” always expected to appreciate against the dollar, he said.

The move “should introduce more volatility,” added Lyons, and companies “will need to manage their currency exposure more closely.”

The slightly wider band may not seem like much, “but it’s a significant shift from where we were before, and it’s a statement of intent,” according to the economist. The band was last widened from 0.3% in 2007.

“Certainly they don’t want to lose control of the currency, and you can see that from the act that they still have such a band,” said Lyons. “But at the same time, they want to encourage greater flexibility in the currency and change the one-way mentality in terms of where people think this currency is going to go.”

The move shouldn’t be viewed in isolation from the other currency and financial-market reforms the Chinese authorities have been introducing over the past few years, according to Lyons.

One of the more significant moves has been the establishment of an offshore yuan capital market in Hong Kong, which trades in so-called CNH (as opposed to CNY, the symbol for the yuan). Two days after the currency band was widened, banking group HSBC issued a yuan 2 billion three-year bond in London.

That was the first such instrument to be issued outside of China and Hong Kong. It had “the aim of tapping the growing pool of [yuan] liquidity across Europe,” HSBC said in a statement. The bond pays 3.00%–3.25%.

Andrew Sawers is editor of CFO European Briefing, a CFO online publication.