Yuan Jumps Most Since 2005 as PBOC Mulls Easing Capital Controls

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China Experiments With Free Trade for Investors
  • Suspected intervention props up currency before IMF decision
  • Policy steps leading toward full liberalization: Commerzbank

The yuan strengthened the most in a decade as China’s central bank said it’s studying looser capital controls, extending a push by the world’s second-largest economy to win reserve-currency status at the IMF.

The Chinese currency also got a boost from suspected intervention in the offshore market as authorities align the exchange rate with prices in Shanghai, a move seen as increasing the odds of an International Monetary Fund endorsement. The yuan gained 0.62 percent to 6.3175 a dollar in onshore trading and added 0.39 percent in Hong Kong.

China’s central bank said Friday that it will consider a trial program in the Shanghai free trade zone allowing domestic individuals to directly buy overseas assets. The nation may dismantle capital controls by 2020, people familiar with the matter said last week, as President Xi Jinping’s government seeks to open up mainland markets to international investors and elevate the yuan’s status on the global stage.

QuickTake The People’s Currency

“These policy initiatives are another important step toward complete capital account liberalization,” Zhou Hao, a senior economist at Commerzbank AG in Singapore, wrote in a note. “Clearly, it shows that China could accelerate financial market reform.”

IMF representatives have told China that the yuan is likely to join the fund’s basket of reserve currencies soon, according to Chinese officials with knowledge of the matter. The yuan has a 90 percent chance of getting in because it has met all technical requirements and political issues have also been largely addressed, according to Standard Chartered Plc. An outright “yes” is the most likely outcome, while a conditional inclusion with pre-specified requirements is also possible, Goldman Sachs Group Inc. economists led by MK Tang wrote in a note Thursday.

Large Chinese banks were seen selling around $15 billion in the offshore yuan market, according to a foreign-exchange trader who declined to be named. The PBOC earlier raised the onshore yuan’s daily reference rate by 0.16 percent, the most in more than a week, to 6.3495 a dollar.

The PBOC first mentioned the so-called Qualified Domestic Individual Investor program for direct overseas investments in a January 2013 statement. An existing program allows individuals to buy securities abroad through asset managers and funds.

Friday’s statement on the Shanghai FTZ, which was issued jointly with several government departments, suggests regulators aren’t far from implementation, said Becky Liu, senior Asia rates strategist at Standard Chartered in Hong Kong.

“This maps out the overall framework of not only FTZ developments, but also the overall direction of China’s capital-account opening in the coming quarters,” Liu said.

— With assistance by Justina Lee, Tian Chen, and Fion Li

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