The People’s Bank of China’s next step in overhauling the exchange rate system will focus on convertibility, Governor Zhou Xiaochuan (周小川) said, as his omission from a top Chinese Communist Party (CCP) committee indicated he will retire.
“For the central bank, I think the next movement related to the yuan is going to be reform of convertibility,” Zhou told the annual meeting of the International Financial Forum, an advisory organization, in Beijing on Saturday.
“We are going to realize it, we are moving in this direction, we need to go further, we will have some deregulation,” he said.
The governor’s comments underscore pledges made by the party during a once-a-decade power transition last week to promote freer movement of capital in and out of the country for investment purposes and to make the exchange rate more market based. China is seeking to boost the use of the yuan in international trade and finance reducing the US dollar’s global dominance and curbing its own reliance on the currency of the world’s biggest economy.
Zhou, who has headed China’s central bank for the past decade, was not named to the new Central Committee of the CCP on Nov. 14, suggesting he will probably soon leave his job.
Possible replacements include Shang Fulin (尚福林), head of China’s banking regulator; Guo Shuqing (郭樹清) chief securities regulator; Industrial and Commercial Bank of China Ltd (中國工商銀行) chairman Jiang Jianqing (姜建清); and Bank of China Ltd (中國銀行) chairman Xiao Gang (肖鋼), according to David Loevinger, former senior coordinator for China affairs at the US Treasury Department and now an Asia analyst in Los Angeles at TCW Group Inc.
During Zhou’s tenure, the country started to overhaul its exchange rate system and financial markets. Changes included revaluing the yuan and ending its pegging to the US dollar in 2005, allowing the currency to become convertible for trade purposes, giving banks more freedom to set interest rates and allowing some foreign institutional investors access to the country’s stock and bond markets.
The yuan has appreciated about 33 percent against the US dollar since the revaluation. The currency had its biggest weekly gain in a month, closing at 6.2356 per US dollar in Shanghai on Friday.
HSBC Holdings Plc analysts led by Qu Hongbin (屈宏斌), the bank’s chief economist for China, said in a report this month that the new leadership may liberalize interest rates and push to make the yuan fully convertible within five years as part of an overhaul that will “revolutionize the country’s financial system.”
Chinese Premier Wen Jiabao’s (溫家寶) government in March picked Wenzhou, a city in eastern China dominated by smaller, non-state enterprises, for a trial program designed to boost capital for private companies that bore the brunt of the economic slowdown that started in 2010.
Zhou said the pilot was hindered partly by Europe’s sovereign debt crisis as the local economy was heavily reliant on exports to European markets.
In a separate speech at Caixin Media’s annual conference in Beijing yesterday, Zhou said China’s central bank needs to be especially alert to the threat of inflation as the country transitions from a planned to a market economy.
The central bank is often pressured by interest groups to relax monetary policy and to support growth, Zhou said. Monetary policy needs to be prudent most of the time because “the risks of overheating are always bigger than the risks of an economic downturn,” he said.
The two-year package, accompanied by an unprecedented bank lending spree, pushed up consumer and asset prices. Inflation accelerated to 6.5 percent in July last year, a three-year high, forcing the central bank to tighten monetary policy through raising interest rates and increasing the amount of deposits banks must set aside as reserves to rein in credit growth.