Chinese Yuan liberalisation? Don't bet on it just yet

The local view is that the comments have to be taken in the context of the outcome of the CP’s Third Plenum which sets the broad direction of policies for the next decade.

There is no – as far as I can tell – specific timetable for the implementation of these reforms at this point.  

In all likelihood, any significant changes remain a distant prospect and it is clear that the current goal is a “managed float” rather than a full and freely market-determined exchange rate.

Since the 2005 Chinese Yuan (CNY) revaluation (+2.1%), there have been a number of minor, incremental steps towards allowing more flexibility in the exchange rate:

• July 2005 – CNY revaluation and shift to “managed floating exchange rate based on market supply and demand with reference to a basket of currencies” (mainly USD, EUR, JPY and KRW but others are included and the weights are kept secret).  Daily fluctuation band set at 0.3%
• May 2007 – daily band widened to 0.5%
• July 2008 – de facto re-pegging of the CNY at 6.83 amid financial turmoil
• July 2009 – broadening of CNY use for international payments
• June 2010 – China announces an increase in CNY flexibility (ending the re-pegging which started in 2008)
• March 2012 – further steps to increase internationalization of CNY (use of CNY to pay for imports etc.)
• April 2012 daily band widened to 1%  

Bottom line: Given this pattern, suspect liberalisation will likely come in steps and over a period of time which would still leave the CNY relatively tightly managed.  

That means that intervention activity may slow but will not stop.  

Keep in mind that increasing liberalisation may mean capital outflows from China, which could weaken the currency – intervention may become more two way.  Note that while the trend in reserve accumulation continues, the pace of reserve growth has already slowed markedly.