Forex market reforms on table
Yuan’s trading band could be widened
BEIJING: A newspaper run by China’s central bank laid out the steps needed for f urther reforms of its foreignexchange market, including widening the yuan’s trading band and reducing state intervention.
In an article titled Exchange Rate Continues Toward Stability at Equilibrium Level, the Financial News said that an improved currency market required more players, additional trading tools and diversified transaction methods.
The front-page story, which cited expert opinion, is part of a series of reports that are typically seen before the Communist Party’s congress held every five years.
Since China’s currency was added to the International Monetary Fund’s reserves basket last year, little progress has been made to liberalise the currency.
Tweaks to the daily fixing have made the reference rate less transparent, while the People’s Bank of China has been speculated to intervene on a number of occasions to slow losses.
The authorities have also taken steps such as tightening capital controls and offshore yuan liquidity in order to stem depreciation pressures.
“Since the currency devaluation in August 2015, the yuan has rarely traded more than 0.5% away from the reference price,” said Ken Peng, Asia-Pacific investment strategist at Citi Private Bank in Hong Kong.
“Widening the band now doesn’t seem to be the most effective way to increase market determination. Reducing the degree of ‘management’ around the reference price would be a very meaningful move, but that would be counterintuitive given that the PBoC just introduced the counter-cyclical factor, which is basically more flexibility to manage the exchange rate.”
China currently allows the yuan to move a maximum 2% on either side of the daily reference rate set by the PBoC.
The range was last widened in March 2014 from 1%, and before that doubled from 0.5% in April 2012. The limit was 0.3% before an adjustment in May 2007.
The onshore yuan climbed 0.19%, the most this month, to 6.7880 per dollar as of 4.48 p.m. in Shanghai yesterday, while the PBoC strengthened its fixing by 0.17% to 6.7868. That makes the spot price 0.02% weaker than the reference rate. The offshore currency gained 0.12% to 6.7924.
“The current 2% trading band provides sufficient flexibility for the yuan to move on a daily basis,” said Khoon Goh, head of Asia research in Singapore at Australia & New Zealand Banking Group Ltd.
“To widen the band further does not really do much, as the authorities will always guard against large intraday movements in the currency.”
In a separate development, Chinese lenders extended more credit than expected in June, as home lending stayed buoyant while a clampdown on shadow financing activities forced banks to shift more loans onto their books.
Beijing has tightened the screws on financial risks due to an explosive growth in debt but has injected substantial liquidity at times to avoid a crunch and maintain stability.
“The stronger-than-expected loans suggest authorities are keeping up support for the real economy, even as they tighten regulations to force banks to deleverage,’’ said Nie Wen, an economist at Hwabao Trust in Shanghai.
“The shadow banking sector is shrinking but credit for the real economy remains strong,” he said.
Chinese banks extended 1.54 trillion yuan ($226.9 billion) in net new yuan loans in June, well above analysts’ expectations of 1.2 trillion yuan, up from 1.11 trillion in May.
Household loans, mostly mortgages, rose to 738.4 billion yuan in June from 610.6 billion yuan in May, according to Reuters calculations based on the PBoC’s data.
Household loans accounted for 48% of total new loans last month, down from 55% in May.
Growth in outstanding yuan loans was flat at 12.9% by month-end, although faster than forecasts of 12.7%.