China's yuan eked out a tiny gain on Wednesday after its biggest swings since 2005 earlier this week, suggesting Beijing's promise of currency flexibility will not produce the rapid gains its trading partners would like.
Whatever its daily gyrations, analysts suspect the yuan will be allowed to rise over time but at a pace that is too slow to narrow China's huge trade surplus with the United States soon.
That could prompt U.S. and other officials meeting at a Group of 20 summit in Canada this weekend to press Beijing further over what its new currency policy will mean in practice.
The United States has officially welcomed China's weekend announcement signaling it was ditching a two-year peg to the dollar, but the country's largest federation of labor unions has already run out of patience, calling for renewed pressure on Beijing from G20 and the U.S. Congress.
The de-pegging story was overblown, said Adam Carr, a senior economist at broker ICAP in Sydney. It lacked substance, given China was never going to make huge inroads into revaluation, he said.
More importantly, it over-emphasized the value of the currency in the Chinese/world growth narrative -- an appreciating yuan is not going to rebalance the world, he added.
The yuan rose 0.02 percent on Wednesday, the third trading day after the central bank said it would allow greater flexibility for the currency but keep appreciation gradual.
That modest move brought the overall gain since the central bank's announcement to just 0.2 percent, a contrast to the market excitement generated on Monday when the currency rose nearly 0.5 percent for its biggest one-day rise since its landmark revaluation in 2005.
That rise gave way to a fall on Tuesday, before Wednesday's flat trade.
Significant dollar purchases by state-controlled banks appeared to be on behalf of the central bank, suggesting the authority continues to exercise a heavy hand in controlling the currency's value, traders said.
YUAN GAINS NOT A SURE THING
Beijing's decision to free the yuan helped fuel a global market rally on Monday on hopes that a stronger yuan would boost spending in the world's third-largest economy and increase its demand for foreign goods, giving a much-needed boost to a global recovery.
That impact has since faded, with Asian stock markets and commodities-linked currencies such as the Australian dollar giving up some of their gains.
The last three days have showed that hopes for a one-way appreciation are wishful thinking. We can tell that they are quite serious about allowing for two-way fluctuations, said Isaac Meng, an analyst with BNP Paribas in Beijing.
Meng said the yuan appeared to be genuinely tracking a basket of other global currencies this time as opposed to the period from mid-2005 to mid-2008, when the reference to a basket was more words than practice.
After two days that saw some of the greatest volatility in the yuan since the revaluation, it traded in a much narrower range on Wednesday, keeping the market guessing as to what the new currency regime would ultimately look like.
A Reuters poll of 33 economists on Monday forecast the yuan would rise to 6.67 per dollar by the end the year, an increase of just 2.4 percent from late last week and similar to the appreciation implied by offshore non-deliverable forwards.
LONG RUN STILL POSITIVE
In the long run, the shift to more two-way movement in the yuan will give the central another lever for keeping the world's third-largest economy on track, helping along important structural adjustments that will see its role as a global consumer rise and its reliance on exports ease somewhat.
To the extent that allowing greater exchange rate appreciation helps rebalancing domestic demand from investment to consumption, that would help, Brian Coulton, head of global economics at Fitch Ratings, said in the Dealing Room, a Reuters chatroom.
In addition, we do think there are inflation pressures and allowing the exchange rate to appreciate would again help mitigate that.
Similarly, despite the initial market disappointment now that the central bank will not allow any steep gains in the yuan, its reforms will still help to gradually revive a commodity price rally, said Tim Condon, chief Asia economist with ING.
We view the restoration of a yuan appreciation trend as part of the normalization of monetary policy, Condon said in a research report.
Just as the crisis forced a change in monetary policy settings, it threw commodity imports off their steady growth trend. We think the (slow) return of policies to their pre-crisis settings will be accompanied by the return of trend growth in commodity imports.
Still, following only modest gains in the yuan this week, some did not take such a positive view of the new regime.
We strongly urge further effort by both the U.S. and other G20 governments until China takes specific steps on a scale that addresses the scale of the imbalance, said Richard Trumka, the president of the AFL-CIO, the largest U.S. federation of labor unions.
(Additional reporting by Koh Gui Qing; Editing by Neil Fullick)