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China’s Central Bank Said to Maintain Prudent Monetary Policy and Continue Promote Yuan Reforms

China’s Central Bank Said to Maintain Prudent Monetary Policy and Continue Promote Yuan Reforms

Renee Mu, Currency Analyst

- PBOC said to maintain prudent monetary policy and maintain moderate liquidity in 2016.

- It will continue to promote yuan reforms and keep the yuan rate relatively stable.

- China to launch registration-based IPO next year, effective on March 1.


(China’s Central Bank)

- The central bank hosted the China Monetary Policy Committee meeting for the fourth quarter recently. In the statement released after the meeting, it is said that the regulator will keep a close eye on the cross-border capital flows and continue to adopt a prudent monetary policy. Also the central bank will maintain moderate liquidity by using multiple policy tools and facility the growth in social financing by reducing the costs. The regulator will further promote reforms in the financial system and improve risk management ability. PBOC will continue toreform in yuan’s rate formation regime and maintain the rates relatively stable and at a reasonable level.

The fourth quarter meeting gives a full picture of the central bank’s monetary policy in the coming year. It is consistent with the decisions made at the Key Economic meeting a week ago: China Announced Fiscal and Monetary Policy for 2016 At the Key Economic Meeting, but with more details. More specifically, it gives us hints for the yuan exchange rates in the near future. We already know that the yuan rate has been de-pegged to the dollar and set to refer to a basket of currencies - China’s Central Bank Prepares Yuan for Fed Hike, Dollar De-Peg. Continued reforms in the yuan means that it will follow the same direction, which leaves room for yuan’s further devaluation against the dollar. At the same time, the central bank made it clear that yuan’s rate will be “relatively stable”, meaning the devaluation is more likely to be step by step, rather than a freefall.

Also, for western traders, it is important to know that despite that the year end is the holiday season and thus naturally has less news in American and European markets, but in China, it is the vital time. A lot of important meetings are held in late December and early January, before the Chinese Tradition New Year, which usually in late January or early February. Two things will be discussed at those high level meetings: summarizing the past year and more importantly, planning for the next year. As result, we may expect to see more key decisions coming from the China in the following few days. They will be covered by this daily digest.

Sina News

(China’s most important online media, similar to CNN in the United States, and it also owns a Chinese version of Twitter, called Weibo, with around 200 million active monthly users).

- The registration-based IPO system has been approved by the China’s National People’s Congress on Monday. The new system will enter effect on March 1, 2016. In a statement issued by the China Securities Regulatory Commission, the officials said that introducing the new system is to let the market force play the major role in determine the allocation of resources and eliminate over-intervention from the government. Under the new system, the approval process will be simplified and the approval standard will be lowed. The rights and obligations of each market participant will be more clarified as well.

Reforms in China’s financial system can be seen everywhere. The key theme is to let the market play a more important role. At the stock market, the regulator follows the same idea. It is like in the football game, the regulator used to be the Team No. 3 in the game in addition to the normal two participants. Now, it decides to step out, gradually, to the edge of the playground, and let the participants to play with more freedom in the field. While, it still stands and watches them at the edge. And it is ready to blow its whistle as soon as sees any violation.

Written by Renee Mu, DailyFX Research Team

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.