China wrapped up its third plenum earlier this month and announced a string of reforms.
Soon after, Zhou Xiaochuan, governor of the People’s Bank of China, wrote an article on deepening financial system reforms in a ‘Guidance Book’ on the third plenum ‘decision’.
“Though the article is very informative about reform ideas and strategies, it contains little new information. It neither gives a specific reform timetable nor hints at any imminent moves,” writes Bank of America’s Ting Lu.
Here are some of the PBoC’s comments so far.
On Tuesday, it was reported that the central bank intends to widen the renminbi trading band, which currently trades in a range of 1%. Though officials have talked about widening the trading band before, it is now expected to widen to 5-10% around a central reference rate that will be set every month or quarter.
“The pace of reform in this regard has been significantly delayed despite frequent mentions of this reform,” writes Ting. “We believe the PBoC will announce the band widening when the global macro environment becomes more stable and the spread between the RMB-USD fixing and spot is relatively stable and narrow.”
Then, Chinese PBoC deputy governor Yi Gang, said “it’s no longer in China’s favour to accumulate foreign-exchange reserves,” according to a Bloomberg report. Yi added that “the marginal cost of accumulating foreign reserves has exceeded marginal gains.” China’s foreign exchange reserves now stand at $US3.7 trillion. Again we had no timeline for this.
Capital account liberalization in terms of cross-border lending and equity portfolio investment will “remain quite slow, except for easing those flows related to allowing offshore RMB to return to China as a result of RMB internationalization.”
Markets are also watching to see when the PBoC will lift the ceiling on deposit rates and allow for true interest rate liberalization. From Ting:
“In the near- to medium-term, PBoC will form a market-based rate system and improve central banks rate control and transmission mechanism. In the medium term, all rates will be liberalized. He reiterated that the PBoC will set up a deposit insurance system. Note that it’s unclear how to define near-term or medium-term.
“In our view, liberalizing bank deposits will be the core of China’s future financial reforms. The PBoC has, in October, started a system to publish major banks’ prime lending rates for rate-pricing guidance; the next steps could be to introduce interbank certificates of deposit (CDs) and to establish a deposit-insurance scheme. Then, China could introduce large-denomination negotiable certificates of deposit (NCDs) to corporates and individuals, and finally gradually loosen restrictions on policy deposit rates.”
These iterations are a very clear sign that Governor Zhou is a reformer and that Beijing wants to be less interventionist. The theme of the third plenum was allowing markets to play a “decisive” role in the economy. But “the market might be overly excited about the pace of financial reforms,” writes Ting.