China may expand yuan trading band due to high volatility of the national currency

Grave macroeconomic risks provoke higher volatility. In this regard, investors expect that the authorities will increase the trading band of the Chinese national currency, thus, allowing the market forces to show their full potential. It’s worth noting that this is the first possible expansion of the corridor in the last 8 years.

Currently, the yuan has a range of 2% against the U.S. dollar. The figure was set by the People's Bank of China (PBOC) in 2014. And since then, the value has rarely exceeded 1% of the midpoint.

Becky Liu, head of China macro strategy at Standard Chartered Bank, notes that given the current position of the PBOC, which at the moment tolerates higher market volatility, a potential expansion of the trading band for the yuan against the dollar can be assumed. Liu suggests that growth from 2% to 3% is possible next year.

Tommy Wu, senior China economist at Commerzbank, has a similar view. He talks about widening the corridor in the second half of next year, since he believes that's when the economy will recover. Moreover, Wu also noted that in the second half of 2023, the interest rate differential with the U.S. is likely to shrink in favor of the yuan.