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China’s Efforts to Make Yuan Rate More Transparent Gain Momentum

There’s growing evidence that China’s efforts to make the yuan more market-oriented are gathering momentum.

The yuan’s daily reference rate needs to be more transparent and rule-based, and the market should be allowed to play a bigger role setting the price, said Pan Gongsheng, head of the State Administration of Foreign Exchange, according to a report by local financial media Yicai on Monday. Pan, also a People’s Bank of China Deputy Governor, was speaking at the annual China Development Forum in Beijing.

Pan’s comments come just weeks after Premier Li Keqiang pledged to “improve the formation mechanism of the exchange rate” this year in his work report delivered on March 5. That phrase reappeared in this year’s annual report after being omitted the two previous years.

The central bank sets a daily reference rate for the yuan in the morning before onshore trading begins. It said in August 2018 that banks have resumed using the counter-cyclical factor, an ad hoc part of the fixing formula, to mitigate the bias toward a weaker yuan. Greater clarity over its use would be among factors that may help enhance transparency.

Policy makers may be under greater pressure to deliver progress on exchange rate reform in 2019 as the U.S. makes the currency’s valuation a key part of negotiations with China on their trade dispute.

Slowing growth, a narrowing current account surplus and the accelerating opening of China’s financial sector also are pushing China toward a more flexible and market-based exchange rate because it can help absorb shocks to the economy during the process.

Fresh signs of economic weakness in Europe and a pause in interest rates hikes by the U.S. Federal Reserve have reduced pressure on the yuan.

“The central bank may reduce intervention on the currency in the future, including perfecting the renminbi’s reference rate,” Tommy Xie, an economist at Oversea-Chinese Banking Corp. in Singapore, wrote in a note Monday, referring to the currency by its other name. “Making it more transparent might come next.”
Source: Bloomberg

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