PIMCO Speculates Possibility of Floating Yuan in 2017
Asset management firm Pacific Investment Management Co. (PIMCO) stated that there is a possibility that China may freely float Yuan this year. The firm stated that alternatively, the country may decide to widen the trading band for the currency. Yuan had a tumultuous time in 2016 as it saw steady decline in its value.
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Luke Spajic, the head of emerging Asia portfolio management at PIMCO, stated in a note that the current valuation of the currency is not justified. He added that there may be a mid- to high-single digit yuan depreciation over the next year. The People's Bank of China has not commented on this issue yet.
Currently, the yuan movement is restricted within 2 percent of the daily value fixed by the central bank. However, the volatility has rarely touched the extreme bands. It is widely speculated that yuan movements are affected through government handling.
However, government intervention has its own limitations. Various actions taken to manage the exchange rate may adversely affect the central bank's ability to adjust its domestic borrowing costs to meet local demand.
Liberalizing currency regulation may cause further depreciation in currency value. However, Zhu Baoliang, Beijing-based chief economist at the State Information Center, said, "Allowing yuan depreciation can reduce domestic risks and interrupt the transmission of global risks."
Despite wide speculations, it is highly believed that the currency policies will be kept intact. With the upcoming political reshuffling later this year, it is important to keep a careful eye over monetary and currency policies. A Bloomberg study reported that the median estimate for yuan value is pegged at 3.5 percent lower by the year end.