U.S. markets closed

China central bank vows faster FX reform; IPO hopes tempered

A woman talks on the phone as she walks along an elevated walkway in downtown Shanghai, November 18, 2013. REUTERS/Carlos Barria

By Aileen Wang and Kevin Yao

BEIJING (Reuters) - China's officials indicated on Tuesday how they plan to steer reforms on interest rates, the currency and stock markets, following a top-level party meeting that promised sweeping changes over the next decade.

Following up on that, central bank chief Zhou Xiaochuan vowed to quicken the process of full yuan convertibility, which would allow the free movement of capital across China's borders and which is a demand of many of the country's major trading partners.

Meanwhile, the top securities regulator sought to temper expectations the government could open the taps on initial public offerings (IPOs). A 60-point reform document issued on Friday had promised to "push forward stock issuance registration system reform" - a phrase previously used to refer to the listing process.

The reforms unveiled by China's leaders were seen as the boldest in nearly three decades as they try to put the world's second-largest economy on a more stable footing after years of breakneck expansion.

Zhou's comments were released as part of a public guide book to the reforms, which was on sale in bookshops for 30 yuan ($5). At more than 300 pages, it provides the full text of the Communist Party's decisions on its reform plan and includes an explanation of the changes by President Xi Jinping. It also includes articles by top officials, such as Zhou.

The central bank governor promised on Saturday to "pull out all stops to deepen financial sector reforms".

In the guide book, he was quoted as saying the central bank would gradually expand the yuan's trading band to help make the currency more flexible and market-driven - comments that repeat a long-standing central bank position.

"We will widen the floating range of the yuan exchange rate in an orderly manner and increase the two-way flexibility of the currency," Zhou was quoted as saying.

To that end, the People's Bank of China will "basically" exit from regular intervention on the currency market, he said, going slightly further than in previous comments when he had said it would reduce intervention.

For years, the central bank has bought up foreign exchange, mostly dollars, to curb strength in the yuan fuelled by the country's export engine.

The yuan's trading band was last widened in April 2012 to allow the exchange rate to rise or fall 1 percent either side of a midpoint fixing announced daily by the central bank.

"We must seize the favorable time window to quicken the pace of realizing yuan convertibility in capital account," Zhou said.

The central bank has pledged to make the yuan "basically convertible" by 2015 but it has not made clear what that means.

Some analysts caution against high expectations for the speed of financial reform, noting some policymakers fear allowing the currency to move freely too quickly could expose the economy to volatile capital flows, such as the ones blamed on the U.S. Federal Reserve's economic stimulus program.

"We will fully achieve interest rate liberalization in the medium term," Zhou said.

Analysts expect the central bank to unveil a long-awaited deposit insurance system by the end of this year or early in 2014 to pave the way for freeing up bank deposit rates, which are now subject to administrative caps.

Such a scheme would protect depositors as Beijing is concerned some smaller lenders could go under as banks compete for deposits in a more open regime. Earlier this year, the central bank removed controls on lending rates.


Beijing is trying to engineer a shift in the giant economy away from investment- and exports-led growth to activity fuelled more by consumption and services. Growth is slowing under the weight of industrial overcapacity and piles of debt.

In its latest report on the global economic outlook released on Tuesday, the OECD predicted China's annual economic growth would accelerate to 8.2 percent in 2014 from an expected 7.7 percent this year as domestic demand picks up.

The Paris-based Organization for Economic Co-operation and Development urged Beijing to quicken its structural reforms while growth is holding steady.

"There is now a favorable window to push forward with structural reform, in particular financial liberalization, encouraging labor mobility and tax reform," the OECD said.

Xiao Gang, chairman of the China Securities Regulatory Commission (CSRC), reiterated a commitment on Tuesday to ease government control over the IPO process, but said the government will also intensify its auditing of companies that hope to list.

"We will unswervingly push forward stock issuance registration system reform and truly give power to the market and investors," Xiao told a financial forum.

"This does not mean that the CSRC will sit idly, which will lead to more junk stocks," he said.

Underlining another reform promise - to give markets a greater role in the economy - the head of the country's top economic planning body said the government should withdraw from sectors of economic activity that the market can handle.

Zhang Yansheng, Secretary-General of the Academic Committee of the National Development and Reform Commission, said instead the government should focus on fulfilling its own role.

At the plenum, Chinese leaders pledged to relax the need for government approval on projects and said the performance of local officials would be rated on measures other than just economic growth, such as environmental protection.

(Additional reporting by Li Ran, Xiaoyi Shao, Natalie Thomas; Editing by Neil Fullick)