China’s loosening grip on yuan may bring in positive effects: analysts

China’s expansion of the trading band for the yuan will likely generate positive effects such as greater investment of Korean firms in the Chinese market, analysts said on Monday.

China began to allow the currency to move up and down by as much as 1 percent on a daily basis, up from 0.5 percent, from Monday. The move attracted keen attention as the country has long been under pressure to loosen its tight grip on the yuan.

“As a result of the expansion of the trading band, the Chinese currency will appreciate at a faster pace, which will pave the way for strong domestic consumption in China,” said Ma Ju-ok, an analyst at Kiwoom Securities.

“The volume of foreign investment funds channeled into the Chinese market will rise again, while Korean shares related to China’s consumer spending will get a boost.”

China’s move is interpreted as a sign that its currency will play a bigger role in the global foreign exchange market.

But the People’s Bank of China ― China’s central bank ― still maintains a firm hold on the daily rate of the yuan against the U.S. dollar, which is called “the parity rate,” as its movement affects its exports and local consumption considerably.

“The appreciation of the yuan makes Chinese goods less competitive in overseas markets and affects employment conditions in a negative way, but given the present factors in and outside of China, the pace of the yuan’s appreciation would be limited,” said Park Mae-hwa, an analyst at Hanwha Securities.

Positive outcomes are likely to outweigh negative ones, Park said, as the expanded trading band will ease inflation pressure and draw more foreign investment.

The Korea Center for International Finance, said China’s latest move on the yuan signals further market-opening and financial reforms down the road.

In a report issued on Monday, the KCIF said China is showing greater confidence about controlling the yuan in a stable manner, as a handful of factors turned positive in recent months.

So-called “hot money,” or short-term speculative investment, has begun to flow back into the Chinese market in a way that reduces the volatility of foreign exchange rates. Its trade surplus is also expected to shrink, which in turn limits the pace of the rise in the value of the Chinese currency.

China posted a trade surplus of $155 billion last year, but the figure is forecast to halve this year.

Major investment banks projected the appreciation of the Chinese yuan would slow down, to about half the level of 4.7 percent tallied last year.

By Yang Sung-jin (insight@heraldcorp.com)