China agrees to reduce FX intervention "as conditions permit"

China agrees to reduce FX intervention "as conditions permit"
People's Bank of China Governor Zhou Xiaochuan addresses delegates at the UK-China Financial Forum at Lancaster House, in London June 18, 2014.

BEIJING - US and Chinese leaders have agreed that China will reduce its intervention in the currency market when conditions are ripe, reaching an understanding on a prickly issue that has hurt ties between the world's two biggest economies for years.

China's Central Bank Governor Zhou Xiaochuan said on the sidelines of annual high-level talks between the two nations that China will "significantly" reduce its yuan CNY=CFXS intervention when some prerequisites are met. He did not give further details.

Analysts said Zhou's unusual candour about China's currency intervention, which was echoed earlier on Wednesday by the Chinese finance minister, suggested that China may be ready to let the yuan rise again once its economy stabilises.

Indeed, US Treasury Secretary Jack Lew told reporters at the end of talks on Thursday that China was committed to reducing its interference with the yuan, "as conditions permit". China will also increase the transparency of its currency policy, he said, describing the agreements as "major" changes.

"The direction of our reforms is clear: we hope that the exchange rate can be kept basically stable, at a reasonable and balanced level through reforms," Zhou said at a briefing on the sidelines of the two-day Strategic and Economic Dialogue.

"At the same time, we will allow market supply-and-demand to play a bigger role in determining the exchange rate, expand the floating range of the exchange rate, and increase the exchange rate's flexibility."

"This means that as the goals are being achieved and when conditions are ready, the central bank will significantly reduce its intervention in the foreign-exchange market."

The value of the yuan has long strained bilateral relations between China and the United States. In June, the International Monetary Fund judged the currency to be "moderately undervalued".

US officials say China deliberately holds down its currency to boost its exports, an accusation China denies. Instead, Chinese authorities weld their currency policy to the idea of stability, a stance that analysts say stems from China's fear of reliving Japan's experience in the 1980s, when a sharp rise in the yen hobbled the Japanese economy.

The yuan has fallen 2.4 per cent so far this year as China's economic growth ground to an 18-month low in the first quarter. There are signs that activity is picking up again, though not as quickly as some had hoped.

"It feels like there was a fairly concrete discussion this time," said Louis Kuijs, an economist at RBS Bank in Hong Kong. "This is not just a repetition of the policy line that lay on the policy shelf.

"I think in the eyes of Beijing, once the concerns of economic growth are convincingly removed, there would be less resistance to letting the exchange rate appreciate."

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