Leap in renminbi trade strains PBoC exchange controls

Statistics published yesterday by the People's Bank of China (PBoC) showed trade in renminbi in the first quarter of the year was 72% higher than its level in first-quarter 2012, adding to the pressure on China to relax its controls on the currency.

The statistics show that settlements of renminbi trade in the first quarter of the year amounted to 1 trillion yuan ($161 billion), compared with 580 billion yuan ($93 billion) in the first quarter of 2012. Trade denominated in renminbi has been rising rapidly, and was up 41% in 2012 compared with a year previously.

China has come under pressure to relax its controls on the exchange rate, which is currently allowed to fluctuate within a band, both from markets and foreign governments. Speaking at a panel discussion during an IMF conference in Washington, DC yesterday, PBoC deputy governor Yi Gang said the central bank would be aiming for a more "market-oriented" exchange rate in future, and hinted that the band (currently 1%) was likely to be widened.

Li Wei, a Shanghai-based economist at Standard Chartered, said the previous increase in the band from 0.5% to 1% had not been enough to prevent "dysfunction" in the foreign exchange market. The PBoC has been moving the band upwards as the currency appreciates, and the renminbi is currently trading near a historical high, at 6.18 yuan to the dollar – the upper limit of the band. This could prompt the PBoC to act, he told CentralBanking.com.

But Li believes widening the band may not be enough. "I think more important than expanding the trading band is to allow the fixing to properly reflect the spot rate," he said. "So even if you expand the trading band that may still not be enough to accommodate the spot movements."

Markets were taken aback this week as Chinese GDP data came in lower than expected, at an annualised rate of 7.7% in the first quarter. The IMF slashed its 2013 growth forecast for China from 8.8% in April 2012 to 8% in the 2013 World Economic Outlook, published on April 15.

Li said the disappointing growth figures were likely to be temporary, as the consumer market "remains solid", and therefore would probably not deter the PBoC from its reform agenda. "Unless we see a continued deterioration in the second quarter, we expect the band widening will not be affected by the first-quarter data," he said.