Yuan Goal Expected To Hinge On Stable Rate

- Jan 27, 2018-

China's plan to fully free up the yuan could take some more time to achieve, since the current top priorities for the government are to maintain a stable currency value and prevent risks from cross-border capital flows, economists say.

There may not be any once-and-for-all measures to complete the foreign exchange rate reform. Instead, the more important effort is to build a mechanism to keep the yuan stable and to some extent keep the exchange rate still under supervision, Chen Weidong, head of Bank of China's international finance research institute, said at a forum at Renmin University of China on Jan 21.

His comments came after the central bank's foreign exchange trade system confirmed on Jan 19 that banks that can suggest the yuan's daily exchange rate against the US dollar have eliminated the effects of the "counter-cyclical factor" - one of the existing three elements to determine the currency's exchange rate.

"The recent appreciation of the yuan, likely driven by the 'counter-cyclical factor', has already deviated from the central bank's desired trajectory," Alicia Garcia-Herrero, chief economist for Asia-Pacific with French bank Natixis, wrote in an article.

This is a warning to the market that the People's Bank of China, the central bank, has already noticed the issue and could adjust the intervention measure easily, she said.

The spot exchange rate of the yuan hit 6.4036 per US dollar in the onshore market on Jan 22, the strongest since Dec 4, 2015. It appreciated by 6.72 percent against the US dollar last year, according to data from the central bank.

The counter-cyclical factor took effect in May 2017, as a measure to ease the yuan's large depreciation against the US dollar and to curb capital outflows.

As cross-border capital flows and the foreign exchange market have been more balanced amid sound and stable economic growth momentum since the second half of 2017, the yuan's exchange rate against the dollar showed both up and down movements with improved flexibility, giving a reason to suspend the use of the factor, says an announcement on China Foreign Exchange Trading System's website.

Wang Yongli, vice-chairman of China International Futures Co Ltd, said at the same forum, held by the university's international monetary institute, that it is tolerable to see the yuan's exchange rate float between 6 and 7 per dollar this year, and that maintaining currency stability is the priority rather than an abrupt freeing of the exchange rate.