PBOC to let market forces shape rates

The People's Bank of China, the central bank, said on July 6 that the country will allow the market to "play a bigger role in deciding the exchange rate of the yuan and increase the currency's resilience against the dollar". Analysts say the yuan will become more flexible against the dollar, although it is expected to remain largely stable.

The central bank expressed its views through its Shanghai head office, which published the China Financial Market Development Report 2016 on its website.

The report said, "Efforts will be made to actively guide and stabilize market expectations, balance cross-border capital flows, and keep the yuan's exchange rate basically stable at a reasonable and balanced level."

Given the still-big interest rate gap between China and the United States, and China's recent tightening of cross-border capital management measures, the country is facing less pressure from capital outflows, and the yuan is expected to be largely stable in the second half of this year, say that a Sinolink Securities report.

But analysts said since the central bank introduced the "counter-cyclical adjustment factor" in setting the reference central parity rate of the yuan against the dollar in late May, the yuan's exchange rate against the dollar is set to become more flexible.

"The central bank report on July 6, which said market forces will have more say in deciding the exchange rate of the yuan, shows that the currency may undergo bigger fluctuations following major changes in the value of the dollar in the future," says Liu Dongliang, currency analyst of China Merchants Securities.

The dollar appreciated sharply in the second half of last year, leading to big depreciation of other currencies. But the yuan had remained relatively strong, failing to reflect the changes in the value of the dollar. "The yuan may become more responsive to changes in the dollar," Liu says.

The central bank also said in its report that the financial market will focus on market-oriented reforms this year. Mechanisms for formation, regulation and transmission of market-oriented interest rates will be improved to enhance the central bank's regulatory purview of interest rates, the report said.