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PBOC Adviser Says Market Will Play Bigger Role in Setting Yuan

PBOC Adviser Says Market Will Play Bigger Role in Setting Yuan

(Bloomberg) -- China’s move to tweak its management of the yuan fixing mechanism shows authorities’ desire to further liberalize the exchange rate, according to an adviser to the People’s Bank of China.

“The counter-cyclical factor was designed to reduce irrational herd mentality,” said Huang Yiping, a professor at Peking University and a member of the PBOC’s Monetary Policy Committee, in an interview in New York. Now that the exchange rate “has stabilized for quite some time, the market force should play a bigger role,” he said.

The PBOC has effectively removed the counter-cyclical factor in calculating the yuan’s daily reference rate that was introduced less than a year ago, Bloomberg reported on Tuesday. The move, which analysts said may increase the volatility of the exchange rate, prompted the yuan to decline the most in almost three months.

Exchange-rate liberalization is just one of a series of reforms on China’s plate. In a wide-ranging discussion on the sidelines of a conference, Huang said that freeing up interest rates should be a priority this year. Chinese policy makers may take “bigger steps” to mitigate financial risks, he also said.

More Defaults?

Top policy makers recently renewed a pledge to control financial risks, calling it a pivotal challenge for the next three years as the nation faces projections for the debt-to-GDP ratio that’s heading toward more than 320 percent by 2022. Authorities are managing risks just as they open the financial system further to foreign firms.

While there were limited achievements over the past two years in rolling back implicit public guarantees of debt -- through allowing more defaults and bankruptcies in failing financial products and institutions -- “we are likely to see marked progress in 2018," Huang said.

When it comes to digital currencies, the PBOC is ahead of other central banks in studying the issue, Huang said. He also said that while the blockchain technology underlying cryptocurrencies has promise, bitcoin has the “obvious” characteristics of a bubble.

“The central bank has a relatively clear attitude toward bitcoin,” the largest cryptocurrency, said Huang, who leads a research center for digital currencies at Peking University in Beijing. “Except for speculation, it has no other investment return. It’s uncertain where the anchor for its value is.”

Since China hasn’t fully opened its financial markets to the outside world, the potential risks surrounding bitcoin include potentially hampering the nation’s controls on capital flows, according to Huang. A surge in use of bitcoin also could facilitate money laundering and worsen corruption, he said.

To contact the reporters on this story: Jacob Gu in New York at jgu3@bloomberg.net, Ye Xie in New York at yxie6@bloomberg.net, George Lei in New York at glei3@bloomberg.net.

To contact the editors responsible for this story: Michael P. Regan at mregan12@bloomberg.net, Kean Zhang at kzhang65@bloomberg.net, Joanna Ossinger, Christopher Anstey

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