PBOC hints at retreat on dollar purchases

Reserves build-up no longer in China's favour, central bank deputy governor says, amid talk that the yuan's trading band could be widened

PUBLISHED : Friday, 22 November, 2013, 3:02am
UPDATED : Friday, 22 November, 2013, 3:02am

The People's Bank of China said the mainland does not benefit any more from increases in its foreign-currency holdings, adding to signs policymakers will rein in US dollar purchases that limit the yuan's appreciation.

"It's no longer in China's favour to accumulate foreign-exchange reserves," Yi Gang, a deputy governor at the central bank, said on Wednesday.

Stopping intervention [in the currency markets] will be very hard to do

Bank governor Zhou Xiaochuan had earlier said it would "basically" end normal intervention in the currency market and broaden the yuan's daily trading range.

Neither Yi nor Zhou gave a timeframe for any changes.

The mainland's foreign-exchange reserves surged US$166 billion in the third quarter to a record US$3.66 trillion, more than triple those of any other country and bigger than the gross domestic product of Germany, Europe's largest economy.

The increase suggested money poured into mainland assets even as developing nations from Brazil to India saw an exit of capital because of concern the United States Federal Reserve will taper stimulus.

Yi, who is also the head of the State Administration of Foreign Exchange, said the yuan's appreciation benefited more people on the mainland than it hurt.

His comments were "consistent with the plans to increase the [yuan's] flexibility so they become less interventionist", said Sacha Tihanyi, a senior currency strategist at Scotiabank in Hong Kong, yesterday.

The central bank might widen the yuan's trading band in "the coming few months", he added.

The yuan's spot rate is allowed to diverge a maximum 1 per cent on either side of a daily reference rate set by the People's Bank of China. The trading range was doubled in April last year after being expanded from 0.3 per cent in May 2007.

The band could be widened to 2 per cent, Apple Daily reported yesterday, citing an interview with former Hong Kong Monetary Authority chief executive Joseph Yam Chi-kwong.

Capital inflows into the mainland accelerated last month, official data suggests.

Yuan positions at the mainland's financial institutions accumulated from foreign-exchange purchases, a gauge of capital flows, climbed 441.6 billion yuan (HK$561.6 billion), the most since January.

About half of last month's increase in the positions was attributable to surpluses in trade and foreign direct investment, with the rest accounted for by inflows of "hot money", Goldman Sachs analysts M.K. Tang and Li Cui wrote in a note on Monday.

The yuan has appreciated 2.3 per cent against the dollar this year.

"It appears that many in the People's Bank think the time is about right to scale back currency interventions," said Mark Williams, the London-based chief Asia economist at Capital Economics.

"But China has got itself into a situation where stopping intervention will be very hard to do" and comments such as Yi's would spur speculative inflows, he said.