Market will play bigger role in setting value of China’s currency, says central bank adviser

PUBLISHED : Wednesday, 10 January, 2018, 9:47am
UPDATED : Wednesday, 10 January, 2018, 2:04pm

China’s move to tweak its management of the yuan fixing mechanism shows the authorities’ desire to further liberalise the currency’s exchange rate, according to an adviser to the nation’s central bank.

“The countercyclical factor was designed to reduce irrational herd mentality,” said Huang Yiping, a professor at Peking University and a member of the People’s Bank of China monetary policy committee during an interview in New York. Now that the exchange rate “has stabilised for quite some time, the market force should play a bigger role”, he said.

The central bank has effectively removed the countercyclical factor in calculating the yuan’s daily reference rate that was introduced less than a year ago, Bloomberg reported on Tuesday. The move, which analysts said may increase the volatility of the exchange rate, prompted the yuan to decline the most in almost three months.

Yuan rises after senior PBOC research official sees room for rate increase

Exchange-rate liberalisation is just one of a series of reforms on China’s plate. In a wide-ranging discussion on the sidelines of a conference, Huang said that freeing up interest rates should be a priority this year. Chinese policymakers might take bigger steps to mitigate financial risks, he also said.

Top policymakers have renewed a pledge to control financial risks, calling it a pivotal challenge for the next three years as the nation faces projections for the debt-to-GDP ratio that is heading toward more than 320 per cent by 2022. The authorities are managing risks just as they open the financial system further to foreign firms.

While there were limited achievements over the past two years in rolling back implicit public guarantees of debt – through allowing more defaults and bankruptcies in failing financial products and institutions – “we are likely to see marked progress in 2018”, said Huang.

When it comes to digital currencies, the People’s Bank of China was ahead of other central banks in studying the issue, Huang said. He also said that while the blockchain technology underlying cryptocurrencies had promise, bitcoin had the “obvious” characteristics of a bubble.

JP Morgan expects mainlanders to continue investing in Hong Kong stocks, as yuan stays strong

“The central bank has a relatively clear attitude toward bitcoin”, the largest cryptocurrency, said Huang, who leads a research centre for digital currencies at Peking University in Beijing. “Except for speculation, it has no other investment return. It’s uncertain where the anchor for its value is.”

Since China has not fully opened its financial markets to the outside world, the potential risks surrounding bitcoin include potentially hampering the nation’s controls on capital flows, according to Huang. A surge in use of bitcoin also could encourage money laundering and worsen corruption, he said.