Yuan set to be more flexible

On Monday, the mid-point for the yuan had been increasing for three straight days, hitting its strongest level since May 11.

Yu Yongding, a former adviser to China's central bank, said in September that it is time for the central bank to reduce intervention in currency markets and let the yuan float freely.

Liu Yuhui, director of the financial lab at the Chinese Academy of Social Sciences, said China should take advantage of the opportunity that market sentiment might drive down the dollar to broaden the floating range of the yuan.

"It is easier for policymakers now to allow market pressures to operate in the foreign exchange market than it was before, as conditions have changed," said Louis Kuijs, chief China economist at the Royal Bank of Scotland Group and a former World Bank economist.

Previously, with a large balance of payments surplus, China's central bank had to intervene massively to prevent market pressures from driving the yuan up sharply. "As such a surplus came down ... it can at the moment let the currency be determined largely by market forces without seeing a sharp appreciation," Kuijs said.

Widening the band could make sense as a controlled next step in financial and monetary reform, he said, adding that China's economy and financial system are robust enough to withstand further flexibility in the exchange rate.

"In any case, it would be more appropriate than moving aggressively on opening the capital account while keeping the exchange rate regime as it is."

A more flexible exchange rate regime is needed to move to a more interest rate-oriented monetary policy and is also a condition for further opening up the capital account, Kuijs said.

wangxiaotian@chinadaily.com.cn