Guan Tao, a former senior official with the State Administration of Foreign Exchange. (Photo/China Daily)
Expert: Controlled regime will be good option for further reform
China has further room to improve the controlled floating exchange rate regime, as it moves toward the ultimate goal to allowing the yuan to float freely, said a former senior official with the nation's top forex regulator.
Guan Tao, a former senior official with the State Administration of Foreign Exchange, said the central bank has made proper adjustments to the pricing regime by adding a countercyclical factor in May, but it is still a "transitional means".
A controlled but not transparent floating regime will be a good option to further implement reform, because absolute transparency might trigger cyclical behavior in the market, and is not appropriate under current circumstances, Guan said.
In the long run, using a formula to price the currency will not be the ultimate choice, because exchange rate management cannot make choices on behalf of the market, he said.
Before seeing a clean float of the yuan's exchange rate, or a free float mechanism, any steps moving forward should be properly evaluated in order to prevent risks, according to Guan.
The central bank implemented a fixing mechanism change on Aug 11, 2015, resulted in the yuan plunging by more than 6 percent against the US dollar and reaching its lowest point since 2008.
"Based upon the yuan's performance since the reform two years ago, steps can be taken when the circumstances are favorable," Guan said.
In comparison, the yuan gained against the dollar after the central bank added a new counter-cyclical factor to the yuan's pricing regime in May.
While the weak dollar and capital outflow control measures played key roles, introducing the factor helped stabilize market expectations, and diminished expectations that the currency was weakening, according to Guan.
"The improved pricing regime helped beat one-way bets on the currency, guiding the market to pay more attention to changes in economic fundamentals and fluctuations in multilateral exchange rates," he said.
The recent stronger yuan reflected the market's adjustment to better-than-expected economic fundamentals, instead of central bank intervention, Guan said.
By the end of Friday, the yuan index stood at 94.03, up by 1.17 points compared with the previous week, latest data from the China Foreign Exchange Trade System showed on Monday.
In the meantime, the government is able to allow more domestic non-banking financial institutions and foreign investors to enter the forex market, because more diversified participation will help avoid similar risks,Guan said.
He said China also needs to strengthen efforts to implement supply-side reform, because economic fundamentals are vital to implement exchange rate reforms.