The yuan rallied for the second day in a row after China’s chief central banker called for a loosening of its exchange-rate curbs and capital controls — measures that would help enthrone the yuan as a currency to rival the dollar.
The Chinese currency USDCNH, +0.1812% climbed to its highest level against the dollar in three weeks on Tuesday, approaching the 16-month high it reached when it closed at $6.4817 on Sept. 8, data from Factset show.
China’s onshore yuan strengthened 1.2% in the span of two days, jumping to 6.572 yuan from 6.650 yuan early Monday, contributing to an overall yearlong gain of 5.4%.
“There isn’t a single country in the world that can achieve an open economy with strict foreign exchange controls…The time window is very important for reforms, an appropriate window must be seized. Once missed, the cost of reform will be higher in the future,” said Zhou Xiaochuan, the governor of the People’s Bank of China, in an interview published late Monday with Chinese business magazine Caijing.
In the run-up to the 19th Party Congress — a twice-a-decade meeting of the Communist Party at the end of October that could help reshape China’s leadership — Zhou’s comments suggest Beijing would be more proactive in transforming the yuan into a global medium of exchange, a status reserved for the dollar.
Zhou, however, has made similar remarks before. Nonetheless, some analysts are anticipating a policy shift from the central bank even if it’s unclear what that would look like as the ruling Communist Party sticks to its mantra of stability.
“The policy reaction function — i.e., how the PBOC reacts to any given economic scenario — may also potentially be re-calibrated after the upcoming party transition and as a result of any shifts of the top political leaders’ key agendas,” said Goldman Sachs strategists led by MK Tang.
But Louis Kuijs, Oxford Economics’ head of Asia economics, said opening up the country to foreign investors was a long-term target, and those expecting a spate of new reforms edging the country toward the internationalization of the renminbi were getting ahead of themselves. The renminbi is the other name for the Chinese currency.
All the same, China has recently taken gradual steps to raise the currency’s importance in international trade. In September, the country pushed major oil exporters like Iran and Russia to price the oil futures contracts in yuan, instead of the greenback. As the yuan is not freely traded or accepted as the dollar in global finance, the contracts will be backed by gold.
The timing of Zhou’s remarks comes on the back of PBOC raising its trading midpoint on late Monday to 6.649 yuan.
“The fixing yesterday overnight was fairly strong, that set a tone,” said Sacha Tihanyi, senior emerging markets strategist at TD securities.
Restating his reform-friendly credentials, Zhou also helped to cap the weakening of the yuan in the past three weeks, which could have given the monetary policy-maker the headroom to issue his bullish comments. The yuan fell since early September, after the central bank arrested its rally by getting rid of a rule that made it costly for speculators to wager against the currency.
Prior to the intervention, the PBOC had encouraged the yuan’s steady rise by slowly lifting its trading midpoints, the main way it fixes its currency.
Zhou may also have felt assured by the continued growth in China’s foreign-exchange reserves, its main tool for fighting a rapid depreciation of the yuan. The PBOC reported on Monday that the country’s foreign-exchange reserves had risen for the eighth straight month in September by $17 billion, to $3.109 trillion.
The bullish impact of Zhou’s remarks are a puzzle when investors consider that a relaxation of exchange-rate restrictions and capital controls has more often than not led to the weakening of the yuan.
Yet amid the backdrop of a weaker dollar DXY, +0.00% this year and abating fears of capital outflows, his remarks would have given impetus to a bullish trade as it would encourage foreign investors and businesses to pour money into China, said Tihanyi.
Source : Market Watch