China to Reduce Yuan Exchange Rate Intervention – Or Is It?

Chinese financial leadership sends seemingly conflicting messages about its commitment to stop fixing the Yuan’s rate and let it flow

pboc_logoThe Governor of the People’s Bank of China (PBOC), Zhou Xiaochuan, said that the Chinese government will allow the yuan to float more freely in accordance to market forces in step with promised FX reforms. This statement from the head of the PBOC comes just a day after the country’s Finance Minister said that China can’t stop its intervention in the exchange rate due to weak economic growth.

Governor Zhou spoke to reporters on Wednesday, at an annual meeting between China and the United States. “We hope that the exchange rate could be kept basically stable on a reasonable and balanced level through reforms,” he said. “At the same time, we will allow market supply-and-demand to play a bigger role in determining the exchange rate, expand the floating range of the exchange rate, and increase the exchange rate’s flexibility. This means that as the goals are being achieved and when conditions are ready, the central bank will significantly reduce its intervention in the foreign-exchange market,” he added.

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Zhou’s words present a much more positive tone to his U.S counterparts than those of Chinese Finance Minister, Lou Jiwei, a day earlier despite basically carrying the same message. Lou said on Tuesday: “The U.S. side has repeatedly asked, in terms of exchange-rate policy, whether China needs to intervene any more, but for us, under the current situation, when the economy hasn’t recovered fully and when cross-border capital flows are not completely normal, we’ll continue existing practices.”

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Long Way to Full Liberalization 

The American political and financial establishments have been trying for a number of years to convince the Chinese leadership to let the yuan appreciate, thinking that the weaker dollar will help solve the trade imbalance, structural unemployment and slow growth that the U.S suffers from. The government of China has committed in the past to FX reforms including unleashing the yuan, mainly to increase the buying power of the Chinese consumer, but also to avoid U.S accusations of market manipulation.

The latest statements show that while the general direction is the liberalization of the currency markets towards an eventually free-floating yuan, the government of China will remain in charge all the way and can slow down the process whenever they think it is not to their economic benefit. Therefore, a free-floating Chinese currency might be a long way off, and its arrival will certainly be difficult to predict.

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