Quantitative Easing

China plans greater yuan flexibility

The mainland is seeking to reduce dominance of the US dollar and curtail its own reliance on the currency of the world's largest economy

PUBLISHED : Saturday, 22 December, 2012, 12:00am
UPDATED : Monday, 30 May, 2016, 5:01pm

China will increase the movement of the yuan's exchange rate "appropriately" to handle the latest rounds of quantitative easing by the world's central banks, Xinhua said in an editorial.

The government of Asia's biggest economy will ensure "reasonable" monetary-base growth and keep sufficient liquidity to allow businesses to obtain loans, according to the editorial, which was also posted on the main central-government website.

"The long-run policy of the Chinese government is to increase flexibility of the renminbi, so it's still an open question whether this will signify any major change in practices," said Mark Williams, the chief Asia economist at Capital Economics in London.

"The government's view seems to be now that the renminbi is close to its fair value, there are lower risks allowing more movement."

The mainland's new leadership, headed by incoming president Xi Jinping, said last week it will retain "prudent" monetary policy and a proactive fiscal policy in 2013.

The US Federal Reserve announced last week plans to start buying US$45 billion a month of Treasury securities from January, in addition to US$40 billion a month of existing mortgage-debt purchases.

Japan's central bank expanded its asset-buying programme for the third time in four months on Thursday, increasing it to 76 trillion yen (HK$7 trillion) from 66 trillion yen.

China is seeking to bolster the use of yuan in international trade and finance to reduce the US dollar's global dominance and curb its own reliance on the currency of the world's biggest economy.

The nation's foreign-exchange reserves are the world's largest at US$3.29 trillion.

China scrapped a dollar peg in July 2005, allowing the currency to appreciate 21 per cent until July 2008, including an initial, single-day gain of 2 per cent. Gains were halted for almost two years to help exporters weather a global recession and the currency has advanced some 10 per cent against the dollar since controls were loosened on June 19, 2010.

The People's Bank of China sets a daily reference rate for the yuan based on market makers' quotations and the spot contract in Shanghai can trade as much as 1 per cent on either side. It last increased the band on April 16, the first expansion since 2007. The yuan has touched both ends of the range since April's move.

The next band widening is forecast to happen by the end of next year, according to 12 of 20 analysts surveyed last month. Eight said they expect a move in 2014.

The trading band will probably be expanded to allow a maximum divergence from the reference rate of 1.5 per cent to 2 per cent, all but three predicted.

The yuan has appreciated 1 per cent against the greenback this year and touched a 19-year high of 6.2223 per dollar on November 27.

The currency slipped 0.03 per cent yesterday to 6.2321 in early trade in Shanghai, a level 0.91 per cent stronger than the central bank fixing of 6.2881.

China needs to strengthen the flexibility of the two-way movement of the exchange rate while keeping the rate basically stable, Caixin Online reported yesterday, citing Li Dongrong, deputy governor of the central bank.