PBOC 'has scope to widen' yuan band

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.