China central bank move on yuan a sign of caution, not reform zeal
Central bank path seen as least risky and also offers a way to hedge against further slowdown
Paradoxical as it may sound, China's move to give the yuan more wiggle room is a sign of caution and deepening concern about the slowing economy rather than a promise of Beijing's vigorous pursuit of market reforms, government economists say.
The move was no big surprise, although by doubling the currency's trading band, the People's Bank of China went a bit further and acted a bit sooner than some had expected.
Yet many took that as a reassurance the broad financial liberalisation promised at a key leadership gathering last autumn was on track, including the expected removal of controls on deposit rates.
However, government economists and policy advisers involved in internal policy discussions said that of all the possible policy steps, the central bank chose the one considered least risky and that also offered it a way to hedge against further economic slowdown.
After a string of weak economic data casting doubt on Beijing's 7.5 per cent growth target for this year and signs of financial strains in some industries and the financial sector, Beijing is now less willing to accept short-term pain.
"The band widening was an easier step. Removing the ceiling on bank deposit rates needs more preparation, and it's unlikely to happen this year," said a senior economist at the Chinese Academy of Social Sciences, a top government think tank.
"It could be at the last of the reform sequence, as the economy faces relatively big downward pressures," said the economist, who requested anonymity owing to the sensitivity of the issue.
On Wednesday, Premier Li Keqiang indicated officials were looking to support the economy, including by speeding up investment and construction.
"We need to seize the time to implement measures that we have determined in expanding domestic demand and stabilising economic growth," Li told a cabinet meeting.
PBOC chief Zhou Xiaochuan said last week that deposit rates are likely to be liberalised in one to two years - the most explicit timeframe to date - and warned that deposit rates could climb as a result of liberalisation.
The insiders said the central bank chose to go ahead with the trading band widening because it is increasingly wary of the impact from thornier changes, such as freeing up bank deposit rates and loosening capital controls.
"The biggest problem is in the financial system. Monopolies create rent-seeking and high borrowing costs despite ample money supply," said Wang Tianlong, an economist at China Centre for International Economic Exchanges, another think tank.
Unlike other reforms, letting the yuan move more freely could offer an immediate benefit given that markets have turned bearish and the currency now looks more likely to test the band's bottom rather than upper limits.
A weaker yuan would offer some relief to struggling exporters even though, in theory, greater currency volatility would work to cancel out those benefits.
Currency traders and government economists point out, however, that the central bank still has the means to restrain the yuan and steer it lower while avoiding sharp swings.
Zhu Haibin, China economist at JP Morgan in Hong Kong, said the timing of the PBOC's announcement just days after poor economic data raised suspicions that the step was mainly designed as a stimulus measure.
"This could be triggered by the weaker-than-expected economic data in January-February. The weak economic data raised the pressure for PBOC to ease its monetary policy," Zhu said in a research note.
"The yuan has been depreciating, and there is no risk of big appreciation," said a senior economist at a top government think tank in Beijing and a former central bank researcher. "On the contrary, it will be a good thing if we see some depreciation; that's precisely what we want."
Think tank sources say the PBOC is prepared to take its strongest action since 2012 to loosen monetary policy if economic growth slows further, by cutting the amount of cash that banks must keep as reserves.
China's sporadic cash crunches since last year, along with risks in the shadow banking sector, have put the PBOC on the defensive and could hinder the reform agenda.
A deposit insurance scheme designed to protect savers against bank failures, which many had expected to be launched at the turn of the year, may still get unveiled before the middle of the year, economists say, but the follow-up will be slow.