China To Reduce Its Intervention In The FX Market

by on July 10, 2014 12:10 pm BST

U.S. and Chinese leaders have agreed that China will reduce its intervention in the currency market when conditions are ripe, reaching an understanding on a prickly issue that has hurt ties between the world’s two biggest economies for years.

China’s Central Bank Governor Zhou Xiaochuan said on the sidelines of annual high-level talks between the two nations that China will “significantly” reduce its yuan intervention when some prerequisites are met. He did not give further details.

Analysts said Zhou’s unusual candor about China’s currency intervention, which was echoed earlier on Wednesday by the Chinese finance minister, suggested that China may be ready to let the yuan rise again once there are signs of stabilization in its economy.

Indeed, U.S. Treasury Secretary Jack Lew told reporters at the end of talks on Thursday that China was committed to reducing its interference with the yuan, “as conditions permit”. He said China was also increasing the transparency of its currency policy.

“The direction of our reforms is clear: we hope that the exchange rate can be kept basically stable, at a reasonable and balanced level through reforms,” Zhou told reporters at a briefing on the sidelines of the Strategic and Economic Dialogue on Thursday.

“At the same time, we will allow market supply-and-demand to play a bigger role in determining the exchange rate, expand the floating range of the exchange rate, and increase the exchange rate’s flexibility.”

“This means that as the goals are being achieved and when conditions are ready, the central bank will significantly reduce its intervention in the foreign-exchange market.”

The value of the yuan has long strained bilateral relations between China and the United States. In June, the International Monetary Fund judged the currency to be “moderately undervalued.”

U.S. officials say China deliberately holds down its currency to boost its exports, an accusation China denies.

Instead, Chinese authorities weld their currency policy to the idea of stability, a stance that analysts say stems from China’s fear of reliving Japan’s experience in the 1980s, when a sharp rise in the yen hobbled the Japanese economy.

The yuan was again a matter of contention at this year’s Sino-U.S. talks, with Lew telling his Chinese counterparts from the start that a move to a market-determined exchange rate was a “crucial step” for China.

In response, Chinese Finance Minister Lou Jiwei said on Wednesday that Washington constantly raises the issue of whether Beijing can stop its yuan intervention. But Lou said it was difficult for China to be hands off given its unsteady economy and abnormal capital inflows.

“It feels like there was a fairly concrete discussion this time,” said Louis Kuijs, an economist at RBS Bank in Hong Kong. “They are saying that we would like to stop intervening, but now is not the time yet.”

“I think in the eyes of Beijing, once the concerns of economic growth are convincingly removed, there would be less resistance to letting the exchange rate appreciate.”


The yuan has fallen 2.4 percent so far this year as China’s economic growth ground to an 18-month low in the first quarter. There are signs that activity is picking up again, though not as quickly as some had hoped.

The ninth-most traded currency in the world, the yuan is kept on a tight leash by China compared with its peers. The central bank sets a midpoint value for the yuan every day, from which it is allowed to rise or fall two percent in the spot market.

Before the yuan’s retreat this year, China’s central bank repeatedly said that it had ceased its currency intervention, and that the yuan was near its equilibrium level.

Foreign exchange traders, however, said they still saw the People’s Bank of China buying or selling the currency in sizable quantities through state banks on the market.

“China is sending a clearer message: it’s unlikely for China to completely stop (yuan) intervention under the managed float regime,” said Zhang Yongjun, a senior economist at China Centre for International Economic Exchange, a well-connected think tank in Beijing.

China’s Zhou also signaled that it was not feasible for Chinese authorities to remain entirely on the sidelines of the foreign exchange market.

“If short-term market volatility or speculative forces are too big, we should take appropriate measures,” he said in reference to gyrations in the foreign exchange market.