Allowing Greater Fluctuations in the Yuan Exchange Rate Now Imperative, Says PBOC

Allowing Greater Fluctuations in the Yuan Exchange Rate Now Imperative, Says PBOC

Xu Wei

Date: Wed, 07/12/2017 - 14:12 / source:Yicai
Allowing Greater Fluctuations in the Yuan Exchange Rate Now Imperative, Says PBOC
Allowing Greater Fluctuations in the Yuan Exchange Rate Now Imperative, Says PBOC

(Yicai Global) July 12 -- An expert urges greater fluctuations in the yuan exchange rate in a report today by the Financial Times media arm of the People’s Bank of China (PBOC).   

To further reduce the intervention of the government on the foreign exchange (forex) market, and perfect China’s forex market accordingly are also steps this expert advises. In detail, measures include increasing transaction participants, enriching transaction tools, adding more transaction modes, decreasing transaction costs, and further expanding the scale of transactions on the forex market.

Since China’s 2005 forex reform, the country has established a manageable floating exchange rate mechanism based on market supply and demand and with reference to a basket of currencies, per this report. Over the past five years, the market-based exchange rate formation mechanism for yuan has been constantly consummated, whereby market supply and demand and the reference to a basket of currencies have been more instrumental in exchange rate formation, and the yuan’s bilateral rate fluctuation flexibility has also further intensified.

As cross-border fund flows converge to strike a balance, the trend of the yuan-dollar exchange rate is heading toward greater stability in phases, with more stable market expectations also congealing. By the end of June, the onshore yuan had appreciated over 2.5 percent against the dollar from year’s start.

In that vein, PBOC once said it will continue to hew to a marketization orientation, one consonant with the reform the central government has instituted. This will further perfect the market-based formation mechanism for the yuan exchange rate, give more decisive play to the market in forming the exchange rate, reinforce the flexibility of bilateral exchange rate fluctuations, properly perfect the exchange rate operating mechanism based on market supply and demand, bilateral fluctuations, and a flexible exchange rate operating system, maintain the basic stability of the exchange rate of yuan at a rational and balanced level, and allow the exchange rate to function as an automatic adjuster of balance of payments.

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Keywords: Forex, Yuan