Chinese yuan softer after trading band doubled

SHANGHAI: China's yuan weakened against the dollar on Monday after the central bank doubled the currencies' trading band as it slowly embarks on long-anticipated financial reforms.

The People's Bank of China (PBoC) said Saturday that it would allow the yuan to move up or down two percent daily -- double the previous one percent -- on either side of a mid-point set under the guidance of the bank, which says it polls market makers.

The yuan was trading at 6.1541 to the dollar on Monday morning, according to the China Foreign Exchange Trading System, compared with Friday's close of 6.1502.

Analysts said the move would introduce greater volatility in trading on the national foreign exchange market, but stressed the central bank could still exercise control over the yuan.

"We view this move as another major step in the direction of allowing the market to play a more important role in exchange rate setting," investment bank Goldman Sachs said in research note released Monday.

But it added: "If the PBoC wish they can still move the rate in the direction they want, since this band only affects how much (the) rate can move intra-day."

Policymakers have pledged to move gradually towards full convertibility of the yuan -- also known as the renminbi -- allowing it to be freely bought and sold, and bringing with it the uncontrolled movement of funds in and out of China.

China keeps a tight grip on its capital account -- investment and financial transactions, rather than those related to trade -- on worries that unpredictable inflows or outflows of funds could harm the economy and reduce its control over it.

The yuan steadily appreciated against the US dollar last year, rising more than three percent.

But last month the Chinese unit suddenly reversed course, at one point closing at an eight-month low, in what dealers believed to be a deliberate move by the central bank to target speculative funds betting on continued rises.

"Now, it is even clearer that the purpose of the depreciation was mostly intended to prepare the market for two-way volatility," Societe Generale Group's China economist Yao Wei said in a report.

Major currencies and even key emerging market units do not usually move more than the four percent maximum intraday change now allowed for China's yuan, she added.

Analysts expect the yuan to be slightly weaker to stable this week after the move but some forecast the unit could still move higher for the full year.

"Fundamentals still point to a stronger currency over the medium term," Capital Economics chief Asia economist Mark Williams said.

"Greater volatility is likely over the months ahead, but as a result of official intervention not market forces," he said in a report.