PBOC economist expects more stable yuan on new forex policy

BEIJING -- China's new foreign exchange (forex) policy will contribute to a less volatile and more flexible yuan in the future, a central bank economist said.

"The possibility of abrupt adjustments in the exchange rate is down substantially as a more market-based price formation mechanism increases flexibility and helps prevent the yuan going against equilibrium," Yicai.com quoted Ma Jun with the People's Bank of China (PBOC) as saying on Sunday.

The central parity rate of the yuan depreciated by 4.66 percent against the US dollar during Tuesday to Thursday, triggered by a PBOC's reform in its forex policy to give market forces bigger say in deciding the yuan's prices.

Ma said the declines were just a one-off price adjustment and dismissed worries about long-term depreciation.

He said China's economy is holding steady and its GDP growth in the rest of the year will outperform the first half.

Active fiscal policies and pro-growth measures will have a positive effect; rising home sales and prices will boost property investment; local governments' debt-swap programs have solved some finance problems for infrastructure, Ma said.

Given bright outlook of the currency, Ma believes claims that a falling yuan will plunge bulk commodities prices, trigger depreciation of other currencies and even affect the US's schedule to lift its interest rate can not hold water.

"Quite a few commentaries are based on expectations of a weak yuan, which appears to be an incorrect precondition, so that exaggerate the spill-over effect of the price adjustments," Ma said.

The PBOC on Tuesday adjusted the exchange rate formation system by taking account of closing rate on the previous day to better reflect market development.

The move, unexpected by the market, prompted a three-day slump before the PBOC reassured investors that the yuan will remain strong and the bank will step in to curb excessive swings.

The market stabilized on Friday as the central parity rate halted the slips and strengthened by 35 basis points to 6.3975 and the spot exchange rate also remained stable at around 6.4.

The yuan has been one of the strongest currencies in the world for years, as its nominal effective exchange rate has appreciated 46 percent since China initiated forex reforms by depegging the yuan from the US dollar in July 2005.