China's central bank mulls further yuan reforms

Beijing, July 12, 2017 (AFP) -China appears to be considering further reforms to its foreign exchange market such as reduced state meddling and freer trading of the yuan, but analysts are sceptical about its efforts to relax currency controls.

A newspaper run by China's central bank published a front page story on Wednesday in which experts called for less government intervention in the country's foreign exchange market and a wider trading band for the Chinese currency.

The article is a sign that the People's Bank of China is mulling the reforms and wants to avoid a repeat of August 2015 when its surprise announcement of a near two percent devaluation rocked global financial markets.

"I do think there is a good reason for them to want to provide advance warning to market participants that a move might be coming," said Julian Evans-Pritchard, China economist at Capital Economics.

But Evans-Pritchard said the changes would be "cosmetic" because the yuan rarely hits the limits of its current trading range and government intervention has been minimal in recent months as worrying capital outflows eased.

If there were an increase in outflows "they would jump back in", he said.

The Financial News article also comes after the central bank said in May that it was considering changing its mechanism for guiding the yuan's value, an announcement widely interpreted as a sign Beijing would tighten its grip despite pledges to allow market forces to play a larger role.

Beijing currently sets a daily trading band for the currency, within which it is allowed to move, but the central bank statement indicated it may tweak that system to give authorities more control as a buffer against market forces.

"The timing is odd given all we hear and all we see are attempts to artificially prevent the yuan being a genuinely market-based currency," said Michael Every, senior Asia-Pacific strategist at Rabobank in Hong Kong.

"Might it be a pre-emptive shot across the bows ahead of the 16 July end of the 100-day period US President Trump set to solve US-China trade tensions? Perhaps."

The yuan is restricted to trading up or down two percent from a daily reference rate, but policymakers have previously signalled their intention to broaden the band.

During last year's presidential campaign Donald Trump had threatened to label China a currency manipulator but he has not done so since taking office in January and his rhetoric on the historically sensitive issue has softened.