PBOC Said to Mull Policy Options to Address Capital Shifts

China’s central bank is preparing potential measures to help address the risk of volatility in capital flows into and out of the nation in the coming months, according to people familiar with the matter.

Two options under consideration are widening the band in which China’s currency, the yuan, is allowed to fluctuate and guiding the exchange rate gradually lower by adjusting the fixing against the greenback, according to the people, who asked not to be named as the discussions are private. The yuan is now subject to a maximum 2 percent divergence on either side of a daily reference rate set by the People’s Bank of China.

While conditions under which such steps would be taken weren’t specified, China took similar action in the first half of 2014, when the PBOC doubled the yuan’s trading limit. The monetary authority also engineered a depreciation in the exchange rate to deter speculative gains, analysts said at the time.

China “is now more concerned with outflows,” said Michael Every, head of Asia Pacific financial-market research at Rabobank International in Hong Kong. “The more prudent choice for them is to gradually weaken the fixing, and widening the trading band would be a more liberal option. Weakening the currency too far, too fast could cause panic and more outflows.”

Balancing Act

Policy makers in the world’s second-largest economy are confronting the challenge of a mixture of capital outflows, slowing economic growth and yet -- on a trade-weighted basis -- an appreciating exchange rate. Steps by central banks from Europe to Singapore to Australia to expand stimulus are driving their currencies down, while the PBOC has limited broad-based easing out of concern over credit bubbles.

The offshore yuan erased gains, trading littrle changed on the day at 6.2705 per dollar as of 3:49 p.m. in Hong Kong, according to data compiled by Bloomberg. The currency climbed as much as 0.16 percent earlier. In Shanghai, the currency rose 0.03 percent to 6.2576, after advancing as much as 0.11 percent.

The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repo rate, fell two basis points, or 0.02 percentage points, to 3.34 percent, according to data compiled by Bloomberg. It rose two basis points earlier.

Growth Slows

China posted the biggest deficit in its capital account since at least 1998 last quarter, adding to signs that funds are leaving as economic growth decelerates. The shortfall was $91.2 billion in the October-to-December period, the State Administration of Foreign Exchange said on its website Tuesday.

The yuan dropped 2.4 percent against the greenback in 2014, which was its first annual decline in five years. Russia’s ruble tumbled 46 percent in the period, the worst performer in the 24 emerging-market currencies tracked by Bloomberg, followed by a 23 percent slide in the Argentine peso

In trade-weighted terms, the yuan’s nominal effective exchange rate reached a record high on Jan. 30, according to an index compiled by Westpac Banking Corp. China last doubled the yuan’s trading band from 1 percent. Against the euro, the Chinese currency touched a 13-year high on Jan. 26 after the European Central Bank announced a bond-buying program. PBOC Deputy Governor Pan Gongsheng said the ECB stimulus was adding to depreciation pressure on the yuan.

Lowering the yuan’s reference rate moderately and widening the trading band can boost exports and make it more expensive for capital to leave, Shanghai Securities News reported on Tuesday, citing former PBOC adviser Yu Yongding.

“Even as exports may not be a vast driver of its growth, China is still a huge trading partner to many, how can it sit back and not get into the currency war?” said Rabobank’s Every.

— With assistance by Steven Yang

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