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China should open up yuan then ease curbs, ex-regulator says

Policymakers have been too quick to open up the country’s capital account, and too slow to reform the currency market

Gulf News

Beijing: China needs to let more participants trade the yuan onshore, a market dominated by commercial banks, before it can consider lifting capital controls.

That’s the view of Guan Tao, former director of the international payments department at China’s State Administration of Foreign Exchange. Lenders and the People’s Bank of China are the main players in the domestic market, which also requires any buyer of foreign currency to show evidence they have a need for that money.

“Banks have similar risk appetites, they are all risk averse and they don’t speculate on the direction of the exchange rate,” said Guan, who worked for the currency regulator for 23 years before leaving in 2015. “Only when there are varying levels of risk appetite will this market enjoy liquidity and see price discovery.”

Policymakers have been too quick to open up the country’s capital account, and too slow to reform the currency market.

“That’s a lesson that needs to be learnt,” said Guan, now a senior research fellow at China Finance 40 Forum, a Beijing-based think tank whose members include PBOC deputy governors Yi Gang and Pan Gongsheng. “But at the very least, the two processes should generally match each other. They are like two wheels in a car — if one is going too fast and the other too slow, the vehicle will be overturned easily.”

The authorities may widen the yuan’s trading band as part of this process, he said.

Chinese banks sold a net 48.3 billion yuan (Dh3.2 billion, $7 billion) of foreign currency for their clients last month, the least in seven months, according to SAFE data released Thursday. Outflow pressures eased significantly last quarter as expectations for a weaker yuan waned, Wang Chunying, a spokeswoman for the regulator, told reporters in Beijing. China won’t return to the “old path” when it comes to capital controls, she said. The yuan has climbed 0.9 per cent so far this year, following its worst annual decline in more than two decades in 2016.

FX veteran

China’s foreign-exchange reforms hit a speed bump last year, as the uptick in outflows and a strong dollar spurred policymakers to tap foreign reserves and tighten capital controls to arrest declines in the yuan. The greenback’s retreat and signs China’s economy is on a stronger footing have helped the currency stabilise in 2017. Officials eased some of the curbs last week, freeing up banks’ ability to process outbound yuan payments for their clients.

Guan worked for SAFE during some of the most important periods in China’s currency-market evolution — from the abolition of the official exchange rate controls in 1994, to the lifting of the dollar peg in 2005 and the yuan’s re-peg to the greenback amid the global financial crisis.