Nathan Chow, a Hong Kong-based economist at DBS Bank (Hong Kong) Ltd., comments on China’s widening of the yuan’s trading band against the dollar. He made the comments in an emailed statement today.
“At present, the cyclical pressure for yuan appreciation has eased with lessening inflation. The yuan story has entered a new phase where the market now considers the currency less structurally undervalued.”
“Widening the band in conjunction with other actions taken by the authorities recently, such as the expansion of qualified foreign institutional investor programs, may further fuel the volatility of the currency due to increased capital flows.”
“In addition, the authority has also increased the yuan’s correlation with a basket of currencies in order to enhance the currency’s two-way flexibility.”
“Against this backdrop, costs will rise for Dim Sum bond issuers as investors will demand higher yields to offset higher currency volatility. Bond buyers will also focus more on credit quality due to reduced appreciation expectations. That said, this change in market dynamic is beneficial to the development of a healthy Dim Sum bond market.”
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