2012-04-15

Yuan band expands: Devil's advocate analysis

This grammatically confusing sentence headlines a Reuters article: Analysis: China currency move nails hard landing risk coffin
China's weekend reform of its currency regime nails shut the coffin on the last remains of doubt about whether the world's second biggest economy has successfully steered a course past a hard economic landing.

Investors were questioning whether the worst sequential slowdown in China's economy since the 2008-09 global financial crisis could enter a sixth quarter after data on Friday revealed the weakest three months of annual growth in three years and a run rate below the official 7.5 percent 2012 target.

Shifting the yuan trading rules is about the strongest signal Beijing could give that growth downside has diminished and potential pitfalls are manageable. Few reforms are as replete with risk as tinkering with the currency because faith in its soundness directly correlates to economic stability.

"For everybody who thought China was heading for a hard landing, it's over. This move says they are comfortable with the direction the economy is moving in," Paul Markowski, president of New York-based MES Advisers and a long-time investment adviser to China's monetary authorities, told Reuters.
This is what an expanded yuan band allows: a faster decline in the renminbi. That doesn't help the Chinese economy transition to a consumer economy, but a weaker yuan can support the manufacturing export sector. So does a wider band signal the economy will not have a hard landing? No, the expansion of the yuan band means China now has a more flexible tool in the exchange rate and try using it to avoid a hard landing.

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