Time right to loosen controls on yuan-dollar exchange rate, says China state-run paper
Comments suggest Beijing’s worries over the weakness of the nation’s currency may be fading, as the value of the greenback slides in global markets
The time is now right to allow greater volatility in the Chinese currency’s exchange rate with the dollar, a state-run newspaper said in a front-page commentary, signalling that Beijing’s concerns over the sharp depreciation in the yuan are easing as the greenback’s value slides.
Beijing has been on the defensive over the value of the yuan for nearly two years after its abrupt two per cent devaluation of the currency in August 2015 roiled global markets.
The Chinese government has taken a slew of measures, from draconian curbs on capital outflow to the adoption of opaque and complex changes to the yuan exchange regime, to keep the currency from weakening sharply.
The China Securities Journal, a newspaper run by the state-run Xinhua news agency, said in an editorial on Tuesday that it was now time for the People’s Bank of China to tolerate greater volatility in the yuan exchange rate.
“The one-sided bet on yuan deprecation has been broken,” the editorial said “Cross-border capital flow has been stabilised and improved in the first half, while supply and demand in the forex market has basically balanced – it is in the most balanced period for the past three years. It’s good timing for China to boost yuan exchange rate flexibility in the short term.”
The yuan has already advanced to a nine-month high against the US dollar. The US dollar index, which compares its value with a basket of currencies, now hovers at a near one-year low as the value of the greenback weakens.
China’s foreign exchange reserves have also been stabilised at a level of US$3 trillion over the past months.
China’s central bank efforts to defeat those who bet on a big slump in the yuan, while successful at face value, have also invited suspicions over whether Beijing is peddling back on its market-oriented liberalisation of the exchange regime to a “managed floating system”.
Zhang Xiaohui, an assistant governor at the central bank, wrote in an article published in the latest edition of China Finance, a central bank journal, that the authorities would “unswervingly” push ahead with yuan exchange rate liberalisation to give the market a decisive role in deciding the yuan’s value.
The China Securities Journal editorial said Beijing’s measures to bolster the value of the yuan were merely “temporary tools in a transitional period” and the direction of market-oriented reforms have not changed.
Liu Jian, a senior analyst at the Bank of Communications in Shanghai, said a key move to increase flexibility was to expand the trading band, moving the yuan-to-dollar daily trading range to three per cent for the Euro, Japanese yen and other major currencies.
The onshore spot price is currently allowed to fluctuate within two per cent of the daily midpoint. The last expansion of the trading band from one per cent was announced in March 2014.
However, more than 60 per cent of daily fluctuations in trading so far this year were less than 0.1 per cent, according to data from the China Foreign Exchange Trade System.
Fluctuations of more than 0.3 per cent were only recorded on 11 working days, with the one per cent level never breached.
“To boost the two-way fluctuations, China needs to allow more players in the forex market and expand forex derivatives as well,” said Liu.