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China Plans Making Yuan More Flexible After Global Easing

China Plans Making Yuan More Flexible After Global Easing
A man on a bicycle looks at a monitor broadcasting a news conference by Xi Jinping, incoming president of China, in Beijing. China’s new leadership, headed by Xi, said last week it will retain “prudent” monetary policy and a proactive fiscal policy in 2013. Photographer: Tomohiro Ohsumi/Bloomberg

China will increase the movement of the yuan’s exchange rate “appropriately” to handle the latest rounds of quantitative easing by the world’s central banks, the official Xinhua News Agency said in an editorial.

The government of Asia’s biggest economy will ensure “reasonable” monetary-base growth and keep sufficient liquidity to allow businesses to obtain loans, according to the editorial, which was also posted on China’s main central-government website.

“The long-run policy of the Chinese government is to increase flexibility of the renminbi, so it’s still an open question whether this will signify any major change in practices,” Mark Williams, chief Asia economist at Capital Economics Ltd., said by phone from London. “The government’s view seems to be now that the renminbi is close to its fair value, there are lower risks allowing more movement.”

China’s new leadership, headed by incoming president Xi Jinping, said last week it will retain “prudent” monetary policy and a proactive fiscal policy in 2013. The U.S. Federal Reserve announced last week plans to start buying $45 billion a month of Treasury securities from January, in addition to $40 billion a month of existing mortgage-debt purchases. Japan’s central bank expanded its asset-buying program for the third time in four months yesterday, increasing it to 76 trillion yen ($903 billion) from 66 trillion yen.

Global Currency

China is seeking to bolster the use of yuan in international trade and finance to reduce the U.S. dollar’s global dominance and curb its own reliance on the currency of the world’s biggest economy. The nation’s foreign-exchange reserves are the world’s largest at $3.29 trillion.

China scrapped a dollar peg in July 2005, allowing the currency to appreciate 21 percent until July 2008, including an initial, single-day gain of 2 percent. Gains were halted for almost two years to help exporters weather a global recession and the currency has advanced some 10 percent against the greenback since controls were loosened on June 19, 2010.

The People’s Bank of China sets a daily reference rate for the yuan based on market makers’ quotations and the spot contract in Shanghai can trade as much as 1 percent on either side. It last increased the band on April 16, the first expansion since 2007. The yuan is a denomination of China’s currency, the renminbi, and has touched both ends of the range since April’s move.

Trading Band

The next band widening is forecast to happen by the end of next year, according to 12 of 20 analysts surveyed last month by Bloomberg News. Eight said they expect a move in 2014. The trading band will probably be expanded to allow a maximum diveragence from the reference rate of 1.5 percent to 2 percent, all but three predicted.

The yuan has appreciated 1 percent versus the greenback this year and touched a 19-year high of 6.2223 per dollar on Nov. 27. The currency slipped 0.03 percent today to 6.2321 as of 10:05 a.m. in Shanghai, a level 0.91 percent stronger than the central bank fixing of 6.2881.

China needs to strengthen the flexibility of the two-way movement of the exchange rate while keeping the exchange rate basically stable, Caixin Online reported yesterday, citing Li Dongrong, deputy governor of the central bank.

While widening the yuan trading band is “the obvious direction,” the government may not do so because it could attract speculative capital betting on yuan appreciation, Williams said.

Liu Mingkang, former head of China Banking Regulatory Commission, predicted Hong Kong and China will face extended inflows of so-called hot money, The Standard newspaper reported today in the city, citing an interview. The yuan is close to equilibrium level and has room for small, “sustained” appreciation in the long run, Shanghai Securities News reports, citing a report from the government-run State Information Center.

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