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China to Loosen Yuan Control
World Economy

China to Loosen Yuan Control

China’s central bank is considering allowing onshore commercial banks access to the offshore renminbi market for the first time in a move that could bring the two distinct currency rates closer together.
The People’s Bank of China said on Tuesday via its microblog that it had held a meeting to look into the possibility. Such a move would mark another step in the loosening of China’s tight currency controls—as well as muddying the signals sent by the onshore and offshore rates, FT reported.
Since China surprised the world last August with a devaluation and a new regime for managing the currency, the offshore rate has been considered a reflection of international investors’ views on China.
At points this year, notably in early January, a growing gap between the fast-weakening offshore rate and the tightly-managed onshore rate, unnerved markets around the world—and forced the PBoC to intervene directly for fear it could prompt further capital outflows.
Following the PBoC’s actions, which also drained liquidity from the offshore market, the offshore renminbi actually ended the first quarter at a stronger rate against the dollar than it began. It has weakened slightly since although the spread to the onshore rate—which is permitted to trade only 2% either side of a PBoC-set midpoint each day—has never approached the extremes of early January.

  Increased Openness
On Tuesday the PBoC said: “Following the development of increased openness in the foreign exchange market, demand from commercial banks for further integration of domestic and offshore foreign exchange markets is strengthening. In order to raise the level of openness of the foreign exchange markets in both directions, in recent days the PBoC held a meeting to research the issue of commercial banks’ orderly participation in the offshore foreign exchange markets.”
Analysts said the unexpected announcement could be related to technical issues such as China joining the International Monetary Fund’s Special Drawing Rights basket of reserve currencies this year.
“This could be a requirement to enter the SDR; this could also be a preparation to smooth out volatilities in offshore because onshore banks would have an extra mandate to stabilize the offshore market to avoid instability akin to January 2016,” said Iris Pang, strategist at Natixis.
No details were given by the PBoC as to what “orderly participation” might look like.
The PBoC was heavily criticized over the lack of signalling ahead of its August devaluation surprise and more recently, its silence in January which unnerved investors and sent worldwide markets tumbling.

  Economic Pressure
China’s economy still faces relatively large downward pressure, the PBoC said in its 2015 annual report, adding that it hopes to keep economic growth within a reasonable range, Reuters reported.
The bank reiterated it would keep monetary policy prudent and pledged to strictly control additional industrial capacity, the central bank said in the report which also contained the outlook for China’s economic conditions.
The central bank expects mild acceleration of inflation, but said the inflation outlook faces uncertainty due to rising housing prices and volatility in agricultural product prices.

  Crossroads
China is at a crossroads where a wrong turn could lead to economic stagnation, says the chief China economist for Citigroup, AAP reported.
Li-Gang Liu says without much-needed debt restructuring and privatization of the state-owned enterprises that dominate the country’s stock exchanges, China would simply “muddle through”, relying on growth to pay down corporate debt until the economy stalled.
The alternative involved stake sales to employees and domestic retail and foreign institutional investors to clean up companies’ balance sheets while opening up the country’s capital markets, he says.
“Going forward, if the government does not tackle the medium-term challenges facing the Chinese economy. . . . we will see economic stagnation in China,” he said during a visit to Sydney on Tuesday.

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