China central bank suggests faster tempo for freeing yuan

Wed Nov 20, 2013 9:00am EST
 
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By Aileen Wang and Kevin Yao

BEIJING (Reuters) - With a shift in tone and language, China's central bank governor has dangled the prospect of speeding up currency reform and giving markets more room to set the yuan's exchange rate as he underlines broader plans for sweeping economic change.

The central bank under Zhou Xiaochuan has consistently flagged its intention to liberalize financial markets and allow the yuan to trade more freely, even before the Communist Party's top brass unveiled late last week the boldest set of economic and social reforms in nearly three decades.

But since the 60-point reform plan was released, Zhou has suggested urgency in pushing for change, although he has not provided any specific timetable. He promised on Saturday to "pull out all stops to deepen financial sector reforms".

Dariusz Kowalczyk, an economist at Credit Agricole in Hong Kong, said the governor's comments could mean that the People's Bank of China (PBOC) will widen the trading band of the yuan in the near term.

"That probably means there is more upside for the renminbi," he said. The yuan, also known as the renminbi, has risen this year to 6.09 per dollar from 6.23 at the end of 2012 and hit a record high of close to 6.08 in October.

However, there was little evidence of any new found freedom for the yuan in trading on Wednesday. On the one hand, the central bank set its daily fixing for the starting point of yuan trade at a record high, but dealers said open market gains were checked by state-run banks selling the currency, probably on behalf of the central bank.

In addition, the daily fixing has been consistently weaker than the spot market, indicating the central bank is trying to rein in the currency's strength.

"The PBOC is still intervening heavily to prevent the CNY (yuan) from appreciating more," said RBS economists Louis Kuijs and Tiffany Qiu in a client note, referring to dollar trade inflows and speculation that are putting the yuan under pressure to rise.   Continued...

 
A man looks at the Pudong financial district of Shanghai November 20, 2013. REUTERS/Carlos Barria