China has ‘halted intervention in yuan exchange rate market’

Market now largely deciding level of nation’s currency, says central bank official, after sustained campaign by authorities to prop up its value amid flow of funds overseas

PUBLISHED : Wednesday, 18 October, 2017, 3:08pm
UPDATED : Wednesday, 18 October, 2017, 11:20pm

The recent stability in the yuan exchange rate has been “completely decided by market factors” as the central bank has basically ended its day-to-day intervention in the foreign exchange market, a deputy governor at the People’s Bank of China said on Wednesday.

Pan Gongsheng, who is also the head of the State Administration of Foreign Exchange, told journalists on the sidelines of the opening ceremony of the Communist Party’s 19th party congress in Beijing that the yuan would have a more secure foundation after the leadership reshuffle meeting.

“After the 19th party congress, the yuan will have better foundation to be more stable,” he said.

Pan’s comments came hours after Washington said China had not unfairly manipulated its currency to give it an unfair trade advantage, a charge regularly levelled by US President Donald Trump during his election campaign.

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The US Treasury Department study backed China’s interventions to shore up the yuan in a foreign currency report released on Tuesday.

“China’s recent intervention in foreign exchange markets, tightened capital controls and increased discretion over setting the daily fixing rate of [the yuan] have likely prevented a disorderly currency depreciation that would have had negative consequences for the United States, China and the global economy,” it said in the report.

However, the department said it remained “concerned by the lack of progress made in reducing the bilateral trade surplus with the United States”.

The yuan exchange rate has been a flashpoint between the US and China, but tensions over the issue have eased after Beijing promised not to devalue the currency to gain an unfair advantage with its overseas trade competitors.

China has engineered a significant appreciation of the yuan against the dollar in the first half of this year through curbs on outbound remittances and payments and the use of a complex mechanism to decide the daily yuan price, a move that offers the People’s Bank of China greater control over the value of the currency.

As China’s capital outflow pressure ebbed with a rise in its foreign exchange reserves for eight consecutive months, the central bank has become more relaxed about defending the yuan compared to a year ago when funds were fleeing the country.

President Xi Jinping said in his 3½-hour speech at the opening of the party congress on Wednesday that China would continue the liberalisation of the exchange rate and interest rate regimes, but did not elaborate.

Yi Gang, a deputy central bank governor who is attending the congress, told reporters the yuan exchange rate regime – a managed floating exchange rate system – worked well.

“I think the current mechanism is good. Based on this, some fluctuation of the yuan is normal,” Yi said.

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China’s retiring central bank governor, Zhou Xiaochuan, said in an interview with the Chinese magazine Caijing published last week that China must let market forces decide the yuan exchange rate and lift all capital account control measures.

China maintains restrictions on capital outflows and data from the commerce ministry showed the country’s outbound foreign direct investment plunged 42 per cent in the first nine months from a year earlier.

The yuan’s daily parity rate against the dollar was set at 6.5991 on Wednesday for the onshore market and under China’s current rules the currency is allowed to rise or fall by up to 2 per cent.