The Chinese yuan, also known as the renminbi, is already convertible under the current account - the broadest measure of trade in goods and services. However, the capital account, which covers portfolio investment and borrowing, is still closely managed by Beijing because of worries about abrupt capital flows.
Beijing to reduce intervention in yuan when time is right, PBOC chief says
Beijing pushes back as US treasury secretary calls for market-determined exchange rate
China will increase the flexibility of the yuan exchange rate and reduce intervention when conditions are ready, its central bank chief said yesterday.
"We hope that market demand and supply will play a bigger role in determining the exchange rate, expanding its floating range and increasing the flexibility of the currency," People's Bank of China governor Zhou Xiaochuan said on the sidelines of the annual strategic and economic dialogue between China and the United States, the world's two biggest economies.
The US has said the yuan is undervalued due to government intervention aimed at boosting exports. US Secretary of the Treasury Jacob Lew, who is in Beijing for the dialogue, said China needed a market-determined exchange rate and urged Beijing to disclose when and why it intervenes in the currency markets.
Finance Minister Lou Jiwei said on Wednesday it would be difficult for China to pledge not to intervene, as the global economy was unstable and there were abnormal capital flows.
"We hope to let the exchange rate stay at an equilibrium and reasonable level. This is the clear direction of the exchange rate reform," Zhou said, adding market interventions would be reduced when conditions allow it. However, the central bank would remain cautious in pushing forward exchange rate reform, as the global market was still unstable, Zhou said.
"When the market is calm and peaceful, the pace of exchange rate reform will move faster," he said. "But when the investment market is volatile or speculative activity is strong, we will take relevant measures."
As major countries adjusted their monetary policies, there had been abnormal fluctuations in the market, Zhou said.
The central bank was preparing monetary policy tools to manage interest rates, he said. "After interest rates are liberalised, the central bank will need an effective transmission mechanism in the money market," Zhou said.
Two to three sets of policy tools would be used to manage short-term liquidity to affect short-term interest rates, while another would manage medium-term rates, he added.