China Widens Dollar Trading Band From 1% To 2%, Yuan Volatility Set To Spike

Tyler Durden's picture

In the aftermath in the recent surge in China's renminbi volatility which saw it plunge at the fastest pace in years, many, us included, suggested that the immediate next step in China's "fight with speculators" (not to mention the second biggest trade deficit in history), was for the PBOC to promptly widen the Yuan trading band, something it hasn't done since April 2012, with the stated objective of further liberalizing its monetary system and bringing the currency that much closer to being freely traded and market-set. Overnight it did just that, when it announced it would widen the Yuan's trading band against the dollar from 1% to 2%.

The PBOC's overnight release:

The healthy development of China's current foreign exchange market, trading body independent pricing and risk management capabilities continue to increase. To meet the requirements of market development, increase the intensity of market-determined exchange rate, and establish a market-based, managed floating exchange rate system, the People's Bank of China decided to expand the foreign exchange market, the floating range of the RMB against the U.S. dollar, is now on the relevant matters are announced as follows:


Since March 17, 2014, inter-bank spot foreign exchange market trading price of the RMB against the U.S. dollar floating rate of expansion from 1% to 2%, or a daily inter-bank spot foreign exchange market trading price of the RMB against the U.S. dollar foreign exchange transactions in China can be Center announced the same day the central parity of RMB against the U.S. dollar and down 2% in the amplitude fluctuations. Designated foreign exchange banks to provide customers with the highest cash offer price of $ day of the minimum cash purchase price difference does not exceed the magnitude of the day the central parity rate expanded from 2% to 3%, other provisions remain in compliance, "the People's Bank of China on the interbank foreign exchange market Trading foreign exchange designated banks listed on the exchange rate and the exchange rate management issues related to notice "(Yin Fa [2010] No. 325) execution.


People's Bank of China will continue to improve the RMB exchange rate formation mechanism of the market, further develop the role of the market in the RMB exchange rate formation mechanism, strengthen two-way floating RMB exchange rate flexibility, to maintain the RMB exchange rate basically stable at an adaptive and equilibrium level.

Amusingly, we may have the first attempt at forward guidance by yet another central bank: that of China. As the WSJ explains: "There is no basis for big appreciation of the renminbi," the PBOC said, noting that China's trade surplus now represents only 2.1% of its gross domestic product. At the same time, "there is no basis for big depreciation of renminbi," the central bank added, saying that risks in China's financial system are "under control" and the country's big foreign-exchange reserves can serve as a big buffer against any external shocks.

Alas, in China merely soothing words hardly ever do the job which is why "while pledging to give the market a bigger role in setting the yuan's exchange rate, the PBOC said it would still implement "necessary adjustments" to prevent big, abnormal fluctuations in the yuan's exchange rate."

The macro thinking behind China's move was foretold well in advance, but for those who missed it, the WSJ does a good recap:

the change, which followed Beijing's landmark move in 2012 to double the yuan's trading bandwidth, is seen as an important step toward establishing a market-based exchange-rate system, whereby the yuan would move up and down just like any other major currency.


The exchange-rate reform is part of China's plan to overhaul its creaky financial sector, elevate the country's status in the international monetary system and someday challenge the U.S. dollar as the de facto global currency.


A freer yuan can also help China deflect foreign complaints about its currency policies. The U.S. and other advanced economies have pressed Beijing for years to relax its hold on the yuan and allow it to appreciate at a faster pace. The hope is to boost consumer demand in China as consumers in Western countries such as the U.S. and Europe pull back amid still-fragile economies.


The move to widen the yuan's trading range comes as China's juggernaut economic machine is slowing down, leading to questions of whether leaders would continue to press ahead on fundamental economic change, or pull back to help struggling companies.

For some even the doubling in the rate band is not enough:

Widening the band would give a greater indication of how the market values the yuan. A prominent Chinese economist, Yu Yongding, for instance, advocates that the daily band be widened to 7.5% in either direction, which would essentially let the market fully determine the rate.

But perhaps the biggest message from today's announcement is that China is preparing to focus far more on its internal affairs rather than dealing with daily FX manipulation, as well as the micromanagement of China's reserves, which recently may or may not have been sod off in the form of US Treasurys.

Meanwhile, loosening its hold on the yuan can also help the PBOC focus more on domestic monetary policy while reducing the need for currency intervention by the central bank.


That is because when the yuan's floating range gets bigger, the yuan won't touch the upper or lower limit of the band as frequently as it did in the past, thereby making it less necessary for the PBOC to meddle in the currency market in a bid to rein in or prop up the yuan's value.


As a result, with the expanded trading band, the PBOC is expected to issue fewer yuan for the purpose of exchange-rate intervention, and that could leave the central bank with more room to manage the domestic monetary policy.


"The PBOC will still resort to intervention, but a wider trading band means that it may not need to intervene as readily as it did in the past," said Christy Tan, a currency specialist at Bank of America Merrill Lynch.

One thing is certain: as the world digests the latest out of the country that creates credit at a pace that is five times greater than the US, the volatility in the CNY will soar, at jthe worst possible time. Because as we explained before, all global specs, especially those out of Hong Kong need, is for the USDCNY to surge above 6.20 for the margin calls to start coming in fast and furious.

* * *

This latest move by the PBOC is merely the latest step in nearly two decades of Chinese currency liberalization. A brief timeline of developments is shown below, courtesy of Bloomberg:

  • January 1994: China unifies official, market exchange rates
  • July 2005: China dismantles decade-long peg, allowing yuan to fluctuate against basket of currencies
  • May 2007: PBOC widens trading band to allow currency to move 0.5% on either side of daily fixing, up from 0.3%
  • April 2012: Yuan band widened to 1%
  • November 2013: Daily trading range will be widened in “orderly way,” PBOC Governor Zhou Xiaochuan says in article; China’s leaders vowed at Communist Party summit to give markets a “decisive” role in pricing of resources, with acceleration of yuan convertibility among key proposals
  • February 2014: PBOC includes “orderly” expansion of trading band among 2014 policy goals; will continue to broaden cross-border usage
  • March 2014: Yuan band doubled to 2% from 1%

* * *

Finally, here are some kneejerk reactions by Wall Street analysts, via Bloomberg.


  • The action, coupled with more two- way volatility, could help discourage “hot money” inflows and encourage companies and banks to be more vigilant about exchange-rate risks, Wang Tao, chief China economist at UBS AG in Hong Kong, says in an e-mail.
  • Action doesn’t have direct implications for direction of CNY against USD
  • UBS still sees exchange rate “broadly unchanged, with increased two-way volatility”
  • Action isn’t surprising because central bank has said for a qhile that it would widen band soon: Wang

Morgan Stanley

  • "We do not think the PBOC took this move to accelerate the CNY depreciation for mercantile interests to stabilize growth,” Morgan Stanley economist Helen Qiao says in e-mailed comment.
  • Wider yuan band will help deter “carry trade speculators” as volatility increases
  • Action is “largely in line with our expectation, as a major step in China’s FX reform” and is part of government’s “continued reform efforts”
  • Recent CNY depreciation created precondition for band widening

Commonwealth Bank of Australia

  • With PBOC dollar purchases being key driver in recent yuan weakness, it will be challenging for yuan to trade at both sides of the doubled trading band in a symmetric fashion, Andy Ji, FX strategist at Commonwealth Bank of Australia, says in email interview.
  • Yuan is unlikely to depreciate substantially without PBOC intervention, given the status of current account surplus and without broad dollar strength
  • Yuan may weaken in 1H then strengthen in 2H, similar to the patterns in past two years


  • PBOC is likely to guide a weaker yuan through its daily reference rate to ensure there won’t be renewed one-way appreciation bets after doubling the trading band, Bank of East Asia FX analyst Kenix Lai says in phone interview today.
  • Yuan band widening announcement shouldn’t be too surprising to market given the PBOC has already signaled such a move in Feb.
  • Yuan should still be able to deliver mild appreciation in 2014 as China continues to push for yuan internationalization

Bank of America

  • Weaker yuan fixings in past month or so has changed one-way appreciation bias, Albert Leung, BofAML local market strategist for Asia, says in email interview.
  • PBOC wants to widen band when market view is more balanced
  • Not very surprising in terms of band-widening timing
  • Another band widening this year is unlikely
  • Knee-jerk market reaction should be higher volatility, with higher NDF, DF implied rates
  • Long-dated NDFs could weaken further, though not necessarily the daily official fixings
  • Any follow-through after the knee-jerk and whether yuan will weaken further will highly depend on PBOC daily fixing and how macro data and corporate credit situation


  • With the band widening and, more importantly, recent spate of weak China data, the bias is for near-term yuan weakness and potentially higher volatility, ANZ FX strategist Irene Cheung says in email interview today.
  • Yuan band widening didn’t come as a surprise
  • Band widening doesn’t necessarily relate to recent PBOC Governor Zhou Xiaochuan’s statement on interest rate liberalization
  • Another widening won’t come so soon given the last move was 2 yrs ago in 2012

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cossack55's picture

Are the physics involved similar to a rubber band?

kliguy38's picture

for every action there is an opposite and equal reaction.... Once they start unwinding the ponzi the reaction will astound the world.........boing

Buck Johnson's picture

Exactly, the unwinding will be just as exponentially bad as it was good.  I think China is about to implode and it could happen anytime.

y3maxx's picture

...It's Russia, China & India vs USSA, Britain & Israel
Both sides are beginning to beat their propaganda drums.
"You're either with us or against us."

holmes's picture

Squeezing Kim Kardashian's ass?

Rafferty's picture

Serious question guys, any explanations?   A friend of mine received a letter from Bank of Scotland/Halifax  enclosing a cheque for nearly £500k. and saying they were closing his account.  No other explanation.  This guy runs a business locally, has  had no problems with the bank, is totally clean.  Any ideas?

Seer's picture

Did the cheque have a picture of Ed McMahon on it?

PT's picture

He doesn't carry enough debt?  Banks want you to be up to your eyeballs in debt so they can charge you bulk in interest and late-payment fees.  They don't need your deposits to lend out because they can just borrow whatever money they need at near zero percent anyway.

He carries too much cash?  Banks want 100% of your money 100 % of the time.  (Hang on, doesn't that slightly contradict what I wrote above - they don't need your deposits?) 

Banks don't want you to be honest and debt free.  They want you to be up to your eyeballs in debt and late fees.  My hunch is that is where the problem lies.  Not the first time I have heard of a good business being f'd over by the banks - but I was too far from the action to be in on the details.  Please let us know if you learn any more.

Anyone else heard of anything similar? 

Deathrips's picture

Thinking out loud, i have an idea.

Maybe the bank is trying to send them money so they doesn't come in and ask for the middle of the global bank run that is looming. Think... the bank could say .."what? we sent you your money, not our problem you cant cash it anywhere". And your friend is left with a beautiful piece of paper that represents untold hours of his/her life. Tell your friend that theres 10000 silver ounces, 150 gold ounces and some palladium/platinum..that is a better representation of his/her work.


Stack it!


Just another option.



Deathrips's picture

Weird ..reposting.



Deathrips's picture




Tortuga's picture

Maybe he should count his blessings, all 500 of them, then get some real money.

Jack4952's picture

I have heard of several such cases: one in which a homeowner was paid off his 15-year mortgage in something like 8 years; the other cases in which credit cards went unused or balances were paid-in-full every month over multi-year perios of time.

I am not sure WHY a bank would do this, however - maybe the banks were not making enough money in fees and interest ????


IridiumRebel's picture

Any idea when they will start to dump the dollar like the Russians? Just trying to front run....

Winston Churchill's picture

Any day with a Y in it , they want.

They didn't want this showdown quite yet.

Lets see if they were as prepared as the Russians appear to have been.

After jaw jaw,you get war war.

Renewable Life's picture

I'm sure it's all just random coincidence, that they do this now, with the Russians unloading USD assets like the house is on fire, and Bammer and the Boyz giving "Monday deadlines"?

But I hope the Russians and Chinese are prepared to go all the way with this, which we all know leads to energy and commodity pricing, because if they don't, it could get ugly for them!!! If they do, it's ugly for US!!!!

Seasmoke's picture


ssp2s's picture

If China was holding an enormous stockpile of gold, all of this might worry me.

Charles Wilson's picture

Somewhere, Ben Bernanke is smiling.  *Mission Accomplished*
The point of QE always had the idea that eventually the Chinese would have to free their currency from the dollar - Stop the manipulation.

All it took was the destruction of the dollar and the anticipation of world war.



HungryPorkChop's picture

@Charles: Maybe true but when they unpeg to the dollar may be the day they start selling massive amounts of T-Bond Holdings and stop using the dollar or SWIFT System. 

This is Helicopter Ben's worst nightmare!!  Did I mention all the gold holdings these BRICS countries have?


Seer's picture

"Did I mention all the gold holdings these BRICS countries have?"

Other than Russia, they'll burn through that gold pretty quick as they import energy.

At the end of the game is the end of the game.  Debts will basically wash away in a torrent of war.  After this end, however, it's then a matter of whether one has resources or not.

Charles Wilson's picture



Ben, however, came into his position after a nice dinner in honor of Friedman and Schwartz.

"You were right", he said to Uncle Miltie concerning the cause of the Depression, "but we won't do it again".

I've said it before, I believe that Bernanke thought he was being the Good Monetarist, allowing huge reserves to be parked in case of a modern, digital Run.  "If the reserves don't "leak" into the system, It's All OK!!!"

Funny thing happened on the way to the Fed, however (See also: "Greenspan advocates Gold Standard").

Let's see...A few people in postions of concentrated Power with other agendas handling the largest Fiat Money Supply in History.  "What could possibly go wrong?!??"

Seer's picture

Let's see...A few people in postions of concentrated Power with other agendas handling the largest Fiat Money Supply in History.  "What could possibly go wrong?!??"

And the converse: what could go right?  Can there really be a wrong when the underlying principle is wrong? (Fiat)

Those familiar with my rantings know that I associate "interest" with "growth," and that I believe that this is the "original sin."  When a system is built around the premise of unlimited growth when there's limited resources it can ONLY go wrong.

10mm's picture


g'kar's picture

JawJaw Obinks will draw another red line somewhere.

remain calm's picture

Straight across the Wookies Mons Pubis. That be some very dangerous territory.

stant's picture

capitol flows to where theres gold

Ban KKiller's picture

As usual questionable accounting is the key as systems become more complex and...uncontrollable. Harder to control all the moving parts so just make up the results you want everyone to see. See ENRON, etc.

Long good compost and seeds. 

Soul Glow's picture

Big things popping.

yogibear's picture

It's a contest between crashing the US dollar or Chinese Yuan.

Currency wars, then real wars.

The loser has a financial disaster.

Crash the US dollar and spike overseas prices already!


Amish Hacker's picture

Don't forget trade wars, historically coming sometime after the currency wars and before the war wars.

No winners here. Every country will be a loser and have a financial disaster.

disabledvet's picture

meh. China has gone all in on the euro and yen just as one economy literally melts down and the other girds itself to rid the Continent of the last vestige of World War II'itis.

I'm sure there's a thank you note in there somewhere.

oak's picture

The trading band could go higher than 2% to accelate the depreciation of CNY soon. The purpose is to stop capital outflows. If one has profit on USD and CNY exchange, one needs to think twice.

GrinandBearit's picture

China is on the way to a gold backed currency.

USD will be toast when (not if) that happens.

Seer's picture

China's export levels aren't exactly strengthening.  And, they're only having to import more and more energy.  Anyone looking at this on a more macro level would see that China is basically exhausting.

The "Last Standing" will be: U.S., Russia and Canada.  All has to do with size, diversity and resources.  If you want to test this just imagine how each country could react if their borders were totally closed to trade.

Winston Churchill's picture

You may not have toimagine that in the near future.

The irony of free trade turning into no trade zones.

The NWO planners must be tearing their hair out.

The best laid plans of mice and men....

Seer's picture


I've never been a believer that any NWO would come about.  I do believe that there is benevolence in it (though how much is the big question, something we'd never know), but, the road to hell...

Mother Nature is settling the trade issues.  It all comes down to conservation of energy.  Nature never created a model like ours because it's just not sustainable...

GrinandBearit's picture

Sure, China's housing market is in the bubble and they are experiecing economic difficulies, but they have much more self-sustaining power than the US does. 

The golden rule applies here... Those who have the gold rule.  China will rule.

Seer's picture

WTF does one use gold for?  Hint: usable things- barter, shit like food and energy.

China can have all the gold in the world, but if the world has no oil available for China then China is just "sitting pretty."

"they are experiecing economic difficulies"

Economic difficulties?  Printing 5x what the US Fed has is just a "difficulty?"

They're an export-bound country (well, that's really the only way one can keep a positive trade balance).  The rest of the world is going broke.  And, they've over-hyped their "vision" to the point that there will be mass upheavals when they start turning off the bubble taps.

Remember: work, the ability to do it, makes things happen- energy, especially in this day and age, is everything. (as much as I hate the bastard, Dick Cheney was absolutely correct when he stated that the "American way of life isn't negotiable," what was behind this was that the US would do whatever it took to maintain its energy supplies.  Without energy rule isn't very possible: in the past the work/energy was in the form of actual human slaves [our "management" eschews actually managing people, in which case fossil fuels are a godsend]).

Seeking Aphids's picture

This will likely support the steady rise in the POG more than the Crimean conflict....where else are the Chinese going to put their money now? Certainly not real estate in China....

Atomizer's picture

I'll repost. Time to suspend the banking activities of US public servant workers. We can wrap up this mystery in 48 hours. NSA, can you hear me now?? Handwriting is on the wall. You either do it or we do legally. Not taking on this mission will result in new budget defunding. Your call! Move quickly..


I’ll let you media cunts figure out how to whitewash this event.

I would continue to buy Gold. Transfer your assets. Goldman Sachs is once again lying to the public. But doing God’s work.


The BRIC countries – Brazil, Russia, India and China – together make up 42% of the world’s population and hold a combined GDP of 18.486 trillion dollars. According to Goldman Sachs, by 2050 the combined economies of the BRICs could eclipse the combined economies of the current richest countries of the world. With the USA and the European Union markets growing annually at 3-4%, BRIC nations pose a greater opportunity over the next five years with an expected growth rate of 9% or more.

Davos 2014: World Bank President on China, BRIC Nations

Davos 2014 - BRICS in Midlife Crisis?

Seer's picture

No question that the BRICS have clout.  However, they too are bubbled up and are poised for pricing corrections, in which case GS's numbers can be taken with a grain of salt...

My own opinion (I've held for years) is that the only REAL players are Russia, US and Canada: Canada is 3rd, it just kind of rides along, but it does have "ample*" resources.

* As compared to the world's other countries.

kareninca's picture

Well, that's handy, since we could take over Canada with no effort whatsoever.

And beating Russia militarily would be easy enough, if we don't mind a few "hot" zones here.

So, all's good.     /sarc

ptolemy_newit's picture

Recent years have seen China purchasing for import, materials from many countries.  The material purchases were contracts to trade in Yuan currency at Yuan rates!  The foreign countries and market speculators were so happy to get Yuan contracts for the ever appreciating Yuan.

China is full up (stock piles) of raw materials on the mainland, in transit and contracted daily monthly and years inventory at the suppliers expense.

The time is now smart to change direction in the Yuan, increase their exports and continue to import with a depreciated Yuan