Central Bank Insiders Push for Greater Exchange Rate Flexibility
A new report from a leading Chinese think tank has called for the central bank to give the exchange rate greater latitude of movement.
The Jingshan report released by the Chinese Finance Forum 40 said that the People’s Bank of China should allow the market to play a greater role in determining the yuan exchange rate, instead of scrutinising fluctuations on a daily basis or adopting active measures such as the recently introduced counter-cylical factor.
According to the report PBOC should refrain from active intervention unless the currency sees precipitous movement past the benchmark of 7.5% on average each year in either direction.
The widening of the fluctuation range serves as a step towards the implementation of a more market-based system for determining China’s onshore exchange rate.
Since the start of the new decade Beijing has gradually expanded the amount that the yuan is permitted to move on either side of the daily reference rate that PBOC sets each day prior to the opening of the market.
The movement threshold has been 2% since March 2014, when it was doubled form the 1% limit set in April 2012, which in turn marked a doubling form the previous 0.5%.
The paper serves as a strong signal of the central bank’s ambitions with respect to the floating of the Chinese yuan, given one of its co-authors includes Huang Yiping, a member of PBOC’s monetary policy committee.
According Zhang Bin, report co-author and a researcher at the Chinese Academy of Social Sciences, the central bank should take advantage of China’s stable economic fundamentals and the strong yuan to forge ahead with exchange rate reforms.
“We should not miss the opportunity,” said Zhang to China Daily. “Reform comes at minimal costs when all signs are in favour of reform.”
“If policymakers have the willingness and resolution [to reform the yuan], I think they can do it now,” Huang said in a social media statement quoted by the South China Morning Post. “Now the timing is good.
“In the past, China’s currency authorities have found themselves fighting either an overwhelming yuan appreciation expectation or a depreciation anticipation.
“They have repeatedly said that the timing was bad to make the exchange rate regime more flexible, but now the market has stabilised.”