Main­land China’s long march to cur­rency re­form takes a step for­ward

The China Post - - WORLD BUSINESS - BY BILL SAVADOVE

Main­land China’s cur­rency de­val­u­a­tion is a step in the long march to a more open regime for the yuan, an­a­lysts say, but author­i­ties will need to fur­ther loosen their con­trols to pro­mote long-term growth.

Main­land China’s cen­tral bank on Tues­day un­veiled a near 2 per­cent de­val­u­a­tion of the yuan, say­ing the move was part of broader eco­nomic re­forms aimed at mov­ing to­wards a more flex­i­ble ex­change rate.

The sud­den­ness and scale of the de­val­u­a­tion in a nor­mally sta­ble unit rocked global fi­nan­cial mar­kets, as in­vestors took it as a sign the world’s sec­ond-largest econ­omy is per­form­ing worse than re­vealed and sparked wor­ries China had fired the first shot in a cur­rency war.

It also com­pounded jit­ters over China’s fi­nan­cial health af­ter a debt­fu­elled stock mar­ket bub­ble burst in June, fol­low­ing a 150 per­cent surge in the pre­vi­ous 12 months.

Main­land China’s cen­tral bank soothed mar­kets by set­ting the daily ref­er­ence rate of the yuan — also known as the ren­minbi ( RMB) — against the U.S. dol­lar marginally higher on Fri­day, end­ing an al­most 5 per­cent fall over three days.

An­a­lysts cheered the move to­ward a more mar­ket-based Chi­nese cur­rency, but said other re­forms had be­come more ur­gent as the Asian gi­ant seeks a more sus­tain­able growth model in the face of a slow­ing econ­omy.

“Re­duc­ing over­val­u­a­tion of the RMB is a welcome change that elim­i­nates one source of un­neces- sary self-in­flicted pain,” the Asian De­vel­op­ment Bank’s chief economist Shang-Jin Wei said Fri­day.

ANZ Bank­ing Group’s chief economist for Greater China, Liu Li­gang, hailed the move as “very im­por­tant” but said more re­forms, such as freer cap­i­tal flows, lib­er­al­iz­ing in­ter­est rates and more al­low­ing fi­nan­cial prod­ucts to hedge against risk, were still needed.

If the bank had acted sooner, the im­pact on the econ­omy would be “more ob­vi­ous,” he told AFP.

The Peo­ple’s Bank of China (PBOC) used to de­cide its daily yuan ref­er­ence rate by polling mar­ket­mak­ers, but will now con­sider the pre­vi­ous day’s close, for­eign ex­change sup­ply and de­mand and the rates of ma­jor cur­ren­cies.

The yuan is re­stricted to trad­ing up or down 2 per­cent from the daily rate, although main­land China’s State Coun­cil, the cab­i­net, has sig­naled it does in­tend to broaden the trad­ing band.

China is cur­rently bid­ding to join the In­ter­na­tional Mon­e­tary Fund’s bas­ket of re­serve cur­ren­cies, but the Washington-based len­der has said more re­forms are needed for mem­ber­ship.

Bei­jing is “killing two birds with one stone: it can re­lease de­pre­ci­a­tion pres­sure to help the econ­omy grow and meet the IMF’s re­quire­ment of let­ting the yuan be more mar­ket-ori­ented,” Zhang Ning, a Hong Kong-based economist for UBS, told AFP.

The yuan de­val­u­a­tion has also been seen as a means for author­i­ties to help China’s slow­ing econ- omy by boost­ing ex­ports — a key driver of China’s ex­tra­or­di­nary rise in the past three decades.

For the Henry Parts com­pany in the eastern city of Ningbo, the de­val­u­a­tion means more or­ders from for­eign cus­tomers for its ma­chin­ery com­po­nents.

“The de­val­u­a­tion will in­crease our rev­enue and we can get the or­ders we couldn’t get be­fore,” man­ager He Zhany­ong told AFP.

China’s econ­omy ex­panded 7.4 per­cent last year, its weak­est since 1990, and has slowed to 7.0 per­cent in each of the first two quar­ters. The gov­ern­ment wants growth of around 7.0 per­cent for all of 2015.

Still, there are wor­ries the move could set off a “cur­rency war” as re­gional neigh­bors and other emerg­ing mar­ket coun­tries face pres­sure to de­value to stay com­pet­i­tive.

“To some ex­tent, the PBOC has served as an an­chor in the re­gion and the move now al­lows other cur­ren­cies to weaken fur­ther,” So­ci­ete Gen­erale Group said in a re­search re­port.

Asia-Pa­cific cur­ren­cies this week suf­fered their big­gest two-day sell­off since 1998, dur­ing the Asian fi­nan­cial cri­sis, while Rus­sia’s ru­ble slid to a six-month low.

A dis­or­derly de­val­u­a­tion could ham­per Bei­jing’s push for greater global stature for the yuan and the gov­ern­ment’s pur­suit of a big­ger say in world fi­nance, typ­i­fied by its role set­ting up two new mul­ti­lat­eral banks for Asia and the BRICS na­tions, which also in­clude Brazil, Rus­sia, In­dia and South Africa.

Ar­gentina has nearly US$34 bil- lion in for­eign ex­change re­serves but about a quar­ter are de­nom­i­nated in yuan and their value de­clined af­ter the main­land Chi­nese de­val­u­a­tion, Bloomberg News re­ported.

Main­land Chi­nese cen­tral bank of­fi­cials have de­nied a cur­rency war was the in­ten­tion, but have been more cagey about the timetable for fur­ther re­forms to the yuan.

Asked if China was on track to open its cap­i­tal ac­count to in­vest­ment flows this year, as pre­vi­ously pledged, one of­fi­cial said the process would be or­derly.

“China’s sched­ule for cap­i­tal ac­count con­vert­ibil­ity is steadily ad­vanc­ing,” PBOC Deputy Gover­nor Yi Gang told a news con­fer­ence on Thurs­day. “We will pro­ceed in an or­derly way ac­cord­ing to our own sched­ule to re­al­ize it.”

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