PBOC 'has scope to widen' yuan band

Economist criticises People's Bank of China for not widening yuan's trading band earlier, but says it could easily be reformed this year

PUBLISHED : Tuesday, 12 March, 2013, 12:00am
UPDATED : Tuesday, 12 March, 2013, 6:44am


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The People's Bank of China has room to widen the yuan's trading band this year, a reform that could have been done earlier and more quickly, a prominent economist and former adviser to the central bank said.

Outgoing Premier Wen Jiabao did a good job in keeping economic growth at about 10 per cent in the past decade, but he could have moved faster in overhauling the exchange rate system, said Yu Yongding, a professor at the Chinese Academy of Social Sciences.

Speaking on the sidelines of the National People's Congress, Yu said reform of the exchange rate mechanism is "relatively easy" compared with other changes, such as liberalising interest rates and opening the capital account, as those carry higher financial risks.

"Had we acted more flexibly, we wouldn't have accumulated US$3.3 trillion worth of foreign exchange reserves - a potato too hot to handle now," he said.

The central bank abandoned the yuan's peg to the US dollar in July 2005, shifting to a floating exchange rate with reference to a basket of currencies. The yuan's daily trading band was widened to 0.5 per cent against the US dollar in 2010 and doubled in width to 1 per cent in April last year.

So as to prevent the yuan from appreciating outside the band, the PBOC has been forced to buy large amounts of foreign exchange, causing the country's foreign exchange reserves to become the world's largest.

State media reported that, owing to the yuan's appreciation against the US dollar, the PBOC may have suffered paper losses worth more than US$270 billion from holding reserves dominated by US dollars during the eight years from 2003 to 2011.

"That's like paying interest to borrowers, a situation that could have been avoided," Yu said.

On the other hand, he said, the pace of interest rate liberalisation has already been fast and must be handled carefully.

Beijing has been relaxing its control over interest rates gradually. In June, the PBOC raised the ceiling for deposit rates to 1.1 times benchmark interest rates and allowed lending rates to float as much as 20 per cent lower than the benchmark levels. However, fast-growing wealth management products and trust loans, which offer higher returns, have aroused concern about risks.

Yu said Beijing should not rush to free up the capital account, as the world's central banks kept printing money to cope with a global economic downturn, which might cause a flood of capital into the country.

He expects the mainland's economic growth to accelerate this year, but warned about rising inflation and asset bubbles.

"In the short term, risks won't be very big," he said. "But if we fail to accelerate reforms, windows of opportunity will close. We will face very serious problems."