Currency to be given freer rein
Print Edition
THE government will “significantly” reduce its yuan intervention if targets for foreign exchange reform are realized step by step and when the right conditions are in place, China’s top banker said yesterday.
The international forex market will see some abnormal fluctuations as major countries adjust their currency policies, People’s Bank of China Governor Zhou Xiaochuan told a press conference at the end of the two-day China-US Strategic and Economic Dialogue in Beijing.
As a result, China has to be discreet about the spillover effect, he said.
According to the latest figures, the yuan has appreciated by more than 12 percent by January this year after the central bank deepened reforms to its exchange rate mechanism just over four years ago, in June 2010.
Zhou’s candour about currency intervention — which was echoed earlier on Wednesday by China’s Minister of Finance Lou Jiwei — suggested that the Chinese government might be prepared to allow the yuan to rise again once it is happy there is clear evidence of stabilization in the nation’s economy, analysts said.
Indeed, United States Treasury Secretary Jack Lew told reporters at the end of the two-nation talks yesterday that the Chinese authorities are fully committed to reducing their interference with the yuan, “as conditions permit.”
“The direction of our reforms is clear: we hope that the exchange rate can be kept basically stable, at a reasonable and balanced level through reforms,” Zhou told reporters yesterday.
“At the same time, we will allow market supply and demand to play a bigger role in determining the exchange rate, expand the floating range of the exchange rate, and increase the exchange rate’s flexibility.”
“This means that as the goals are being achieved and when conditions are ready, the central bank will significantly reduce its intervention in the foreign-exchange market.”
Zhou said China is likely to have fully liberalized interest rates within two years, but the timetable will depend on economic circumstances at home and abroad.
“The timetable to liberalize interest rates will be mostly carried out according to conditions of the domestic economy and global economy, but we believe it could be realized within two years,” he said.
In March, Zhou said at the annual legislative session that the country is very likely to ease its grip on banks’ deposit rate, the last and most important step of interest rate liberalization, in the coming one or two years.
The leadership has stressed “a sense of urgency in reform” and the People’s Bank of China is preparing accordingly, he said yesterday
Once the interest rate is freed up, the central bank will have its policy rate play a guiding role in the market via mechanisms on the monetary market, Zhou said, adding that the bank is preparing two or three sets of such tools.
China has taken incremental steps toward interest rate liberalization, including a decision last July to scrap the floor limit for bank lending rates, and a guideline in December for piloting negotiable deposit certificates on the interbank market.
(Agencies)
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