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China’s central bank suggests expediting currency reform

Peoples_Bank_of_China_logo_smallZhou Xiaochuan, the governor of the People’s Bank of China, indicated the possibility of expediting currency reform and allowing markets to play a larger role in setting the yuan’s exchange rate.

Zhou has repeatedly signaled the Chinese central bank’s intent to liberalize financial markets, but since the Chinese government released its 60-point social and financial reform plan, he has suggested urgency in advocating for the change, Reuters reports.

Markets, however, showed little evidence of currency liberalization on Wednesday, as the central bank fixed the yuan’s starting trade at a record high and dealers said gains were checked by state-controlled banks selling the currency.

“The PBOC is still intervening heavily to prevent the [yuan] from appreciating more,” RBS economists Louis Kuis and Tiffany Qiu said, according to Reuters. “Freeing up the currency would imply a very large appreciation versus the [U.S. dollar], something for which we believe there would not be appetite right now.”

The recently announced changes are included in a public guide book to the government’s reforms sold in bookshops for approximately $5. With over 300 pages, the full text of the plan includes articles from top officials and an explanation of the changes.

Zhou said in the guide book that PBOC would gradually expand the yuan’s trading band to increase the currency’s flexibility and market appeal.

“We will widen the floating range of the yuan exchange rate in an orderly manner and increase the two-way flexibility of the currency,” Zhou said, Reuters reports.

PBOC has bought up foreign exchange—mostly dollars—for years in an effort to limit the strength of the yuan driven by China’s export system, helping to build the world’s largest currency stockpile of $3.66 trillion.

Currency intervention has been a key component of China’s plan to reduce inflationary risks, prevent housing bubbles and drive the expansion of money and credit, according to Reuters.

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