China’s yuan takes first big swing in wider band


The yuan fell more than 1 percent versus the U.S. dollar to its lowest level in almost a year on Wednesday in the Chinese currency's biggest swing since its trading band was widened at the weekend.

And the move probably reflects Beijing showing that it means what it says when it comes to allowing greater two-way trade in its currency, analysts say.

(Read more: The yuan trading band has been widened- Now what?)

Peter Parks| AFP | Getty Images

"The yuan went to the weakest end of its band after the 2012 band widening, which was 1 percent above the mid-point [for dollar/yuan]. Now we're there again, but now the top end of the band is 2 percent," said Nizam Idris, managing director, head of strategy, fixed income and currencies at Macquarie Bank in Singapore.

"The only significance today is that we are the furthest away from the fixing than ever before because now we can be. This is probably a reflection of China justifying a widening of the band, showing that the yuan can use up more than a 1 percent move each day," he added.

The yuan, also known as the renminbi, fell to 6.2003 per dollar, its lowest level since April 2013 and down 1.06 percent from a mid-point of 6.1351 to the dollar set by the central bank early on Wednesday.

China's central bank, the People's Bank of China (PBOC), on Saturday doubled the yuan's daily trading range to allow it to rise or fall 2 percent around a daily mid-point.

Fresh signs of China's financial stress

The move is seen as important step in the direction towards making the yuan, also known as the renminbi, a fully convertible currency.

(Read more: Default risks trigger fresh fears over China property market)

The yuan has been in a strengthening trend since the currency's peg against the dollar was dropped in 2005.

In recent weeks, however, the currency has been more volatile and weakened against the greenback. Analysts say Beijing is keen to introduce more two-way risk into the market and ward off those just betting on the yuan heading in one direction.

"Sentiment towards the yuan remains relatively negative," said Mitul Kotecha, head of global currency research at Credit Agricole in Hong Kong. "This is partly because the central bank has been pushing the fixing towards a weaker yuan and that partly reflects the economic risks, clearly recent data has been weaker."

"In the short-term this should continue and it's in line with the band widening and two-way risk the central bank wants to instigate," Kotecha added.

A recent run of weak economic data has raised concerns about the health of the world's second biggest economy. Chinese exports, for instance, fell 18.1 percent in February from a year earlier – well below market expectations for a rise of 6.8 percent.

(Read more: China February exports tumble amid global uncertainty)

"We see risks of further near-term yuan weakness, but do not expect this to extend beyond the second quarter," analysts at ANZ said in a note on Tuesday. They revised their year-end dollar/yuan forecast to 6.08 from 5.98.

"It is not in the PBOC's interests to have a sustained depreciation in the currency, as this will increase financial stability risks," they added.

— By CNBC.Com's Dhara Ranasinghe; Follow her on Twitter @DharaCNBC