Central bank to promote flexibility
Print Edition
China’s central bank is to cease regular intervention in the foreign-exchange market, allowing the market to play a basic role in the formation of the foreign exchange rate.
The government will widen the yuan trading band in an “orderly” manner as it seeks to promote a more flexible currency under a managed floating exchange rate regime, Zhou Xiaochuan, governor of the People’s Bank of China, wrote in a guide book on reforms.
Currently, the central bank sets a daily central parity rate for the yuan against the US dollar, allowing the yuan to be traded within 1 percent on each side of the reference rate. The trading limit was doubled in April last year after having been increased from 0.3 percent in 2007.
The central bank will “basically” quit daily guidance on the yuan exchange rate, Zhou said, without giving a timeframe.
Zhou’s comments echoed a reform blueprint released after the Party’s Third Plenum last week, which pledged to make the yuan exchange rate more market-based and to push ahead with interest-rate liberalization.
China will accelerate market-oriented reform on interest rates and will “fully achieve interest rate liberalization in the medium term,” Zhou said.
In July, the central bank removed the lower limit for interest rates on loans to give banks more autonomy.
Zhou said China will accelerate the establishment of a deposit insurance system to prevent risks and ensure financial stability.
Analysts expect the bank to unveil a deposit insurance system as soon as the end of this year to pave the way for freeing up bank deposit rates.
China has been cautious over financial openness, fearing that allowing the free flow of capital might lead to an influx of speculative money and volatile capital flows that would undermine economic stability.
Zhou said that China would quicken the pace of realizing yuan convertibility under the capital account while improving financial regulation.
Zhou also proposed to promote two-way openness of the capital market by further increasing investment quotas under the Qualified Domestic Institutional Investor and Qualified Foreign Institutional Investor programs.
To further facilitate cross-border investments, the approval procedure of quota and qualification for both domestic and foreign investors will be canceled when conditions are right, Zhou said. The investment quota for QFII was expanded to US$150 billion from US$80 billion in July in an effort to attract more long-term overseas funds and bolster the country’s equity market.
Besides lifting the investment quota, China has been accelerating the opening of domestic capital markets to foreign participants by easing requirements for QFII qualification and speeding up the approval process.
In October, China granted a US$1.02 billion quota for qualified foreign institutional investors, bringing the total to US$48.5 billion.
Meanwhile, Xiao Gang, chairman of the China Securities Regulatory Commission, promised to cede government power to the market and investors by easing control on the initial public offering process.
“The transition to a registration-based stock issuance system rather than the approval system is the key to all reforms in the capital market,” Xiao told a financial forum yesterday.
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