China’s central bank is considering a widening of the yuan’s trading band following an important Communist Party meeting this year – a largely cosmetic move that would burnish its reform credentials as official policy focuses on reducing debt.
The People’s Bank of China (PBOC) could widen the yuan trading range to allow it to rise or fall by 3 per cent against the dollar from the daily mid-point rate set by the central bank, according to four sources familiar with internal policy discussions. The current band allows for 2 per cent fluctuations.
The measure would allow the central bank to argue the yuan’s liberalisation was on track and could be useful in trade talks with Washington. However, tight controls on capital outflows and the level at which the yuan starts trading each day would reduce its impact, the sources said.
“A yuan band widening is possible. There could be some internal consensus on this,” said one source who advises the government on policy. “But the impact won’t be big – it may just be a gesture to express the commitment to long-term market reform.”
Indeed, there seems to be little immediate pressure to widen the band – the yuan has never tested the 2 per cent daily limit that was introduced in March 2014.
The adoption of an undisclosed “counter-cyclical factor” in May gave the central bank greater control in setting the daily level around which the yuan can trade, but raised questions about its commitment to opening up the currency.
“We are going backward by adding a counter-cyclical factor,” said the policy adviser. “It’s very clear that the leadership wants exchange rate stability.“
However, there have been growing calls for yuan liberalisation, a favoured reform during recent Party Congresses, which are held every five years. The yuan trading band was widened in 2007 and 2012 before the party meetings.
One difference this year is that the change would likely come after the congress as officials have put a premium on market and economic stability this year, according to the…