PBOC Will ‘Basically’ End Normal Yuan Intervention: Zhou (Nov 2013)


Source: Bloomberg – PBOC Will ‘Basically’ End Normal Yuan Intervention: Zhou

Notable excerpts:

China’s central bank will “basically” end normal intervention in the currency market and broaden the yuan’s daily trading limit, Governor Zhou Xiaochuan said, without giving a timeframe.

The daily range will be widened in an “orderly way” as China seeks to enhance the currency’s two-way flexibility, Zhou wrote in an article in a guidebook explaining reforms outlined last week following a Communist Party meeting. The nation will phase out investment caps for both domestic and foreign investors, he added. A ceiling on deposit rates offered by local banks will be gradually removed as well, PBOC Deputy Governor Yi Gang wrote in the book.

We will increase the role of market exchange rates, and the central bank will basically exit from normal foreign-exchange market intervention,” Zhou wrote. The central bank will “establish a managed floating exchange-rate system based upon market supply and demand,” he added.

Acceleration of yuan convertibility and liberalization of interest rates were among the key reform proposals decided on at the Third Plenum and published by the official Xinhua News Agency on Nov. 15. The party said it plans to achieve these targets by 2020.

“Even if Zhou hadn’t made these comments, yuan reforms were already heading toward liberalization, and it’s just a matter of time,” Bruce Yam, a currency strategist at Sun Hung Kai Forex in Hong Kong, said yesterday. “These public comments suggest the speed’s picking up.

‘Favorable Time’

China should seize “any favorable time window in yuan capital-account convertibility” to accelerate reform, Zhou wrote in the book. The PBOC’s Yi said in April the currency’s trading band will be expanded “in the near future.”

Twelve-month non-deliverable forwards in the yuan rose after Zhou’s comments were reported, gaining the most in a month to 6.1440 per dollar as of 6:07 p.m. in Hong Kong yesterday, according to data compiled by Bloomberg. The onshore currency closed little changed at 6.0927 in Shanghai. One-month implied volatility in the onshore yuan, a measure of expected moves in the exchange rate used to price options, jumped 13 basis points, or 0.13 percentage point, to 1.67 percent.

The Chinese central bank limits the yuan spot rate’s daily moves to 1 percent on either side of a fixing it sets every day. The trading band was widened in April 2012, after being expanded from 0.3 percent in May 2007. The yuan in Shanghai has traded 0.7 percent stronger than the fixing on average this quarter, down from 0.8 percent in the first nine months of the year, according to data compiled by Bloomberg.

Investment Quotas

China’s central bank governor said in November 2012 that convertibility will be the next step in the overhaul of the exchange-rate system. “We are going to realize it, we are moving in this direction, we need to go further, we will have some deregulation,” Zhou said at a conference in Beijing then.

Quotas under the Qualified Domestic Institutional Investor and Qualified Foreign Institutional Investor programs will be expanded and then scrapped, Zhou said in the plenum book comments. The PBOC will start a trial program, called QDII2, that will allow individuals to invest overseas, Yi said. The monetary authority has identified the QDII2 program as a major goal for this year, according to a statement on its website in January.

“We expect the changes to be gradual,” said Dariusz Kowalczyk, a Hong Kong-based strategist at Credit Agricole CIB. “This would likely put upward pressure on portfolio asset prices onshore.’

Borrowing Rates

China started publishing a new prime loan rate based on quotes from banks in October and signaled it may eventually replace the current PBOC benchmark. In July, the central bank scrapped a floor on lending rates.

The nation will ‘‘stick to the general direction of establishing and improving an interest-rate formation mechanism decided by market supply and demand,’’ Zhou said in the book. The PBOC will also promote interbank issuance, and trading of certificates of deposits will start soon, he added.

‘‘It’s a big step to take,’’ Patrick Bennett, Hong Kong-based strategist at Canadian Imperial Bank of Commerce, said by phone yesterday. ‘‘My caution right now is these are statements rather than a timetable that we know will happen.’’


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