Reform set to broaden yuan range

China will continue to broaden the permitted fluctuation range of yuan trading as the next step in deepening currency reform, a central bank official said on Tuesday.

"Market-oriented progress in interest rate and currency exchange rate reform will provide huge opportunities as well as challenges for the country's payment and settlement system," said Wang Yu, deputy director-general of the research bureau of the People's Bank of China.

She made the remarks while attending a forum in Beijing, without elaborating as to what extent and when the monetary authorities would make new adjustment to the range.

Last April, the central bank allowed the yuan to fluctuate by 1 percent from a daily midpoint, doubling the previous 0.5 percent. It was the first time since May 2007 that the trading band was widened.

The yuan rose to a 19-year high on Tuesday after the central bank set a record fixing against the dollar for the third consecutive trading day.

The yuan strengthened to 6.1831 per US dollar in Shanghai, against a reference rate of 6.2408, according to the China Foreign Exchange Trade System. It touched 6.1800 earlier, the highest level since the government unified official and market exchange rates at the end of 1993.

Wang said the central bank would also improve the foreign exchange market to promote currency reform, by introducing more market players and trading methods, broadening the allowed trading scale, and reducing trading costs.

As China continues to reform the yuan and promote international use of the currency, it needs to further open and diversify the domestic payment and settlement industry, the Chinese Academy of Social Sciences said in a report released on Tuesday.

Cheng Lian, a senior financial analyst at the major think tank for the Chinese government, said that without the firewall of the yuan's inconvertibility under the currency account, an over-concentrated payment and settlement system would expose the economy to greater financial risks than a scattered and diversified system.

According to the report, State-owned banks' contribution to total capital flows dropped to 36 percent by the end of 2011 from the 44 percent in 2007, while that of urban commercial banks rose from 7 to 10 percent.

"Although China is likely to witness the rapid development of the payment and settlement sector, especially driven by e-commerce, a more modernized system would have some negative influence on the monetary authorities and affect the effectiveness of policies," said Zhang Chengsi, a professor of finance at Renmin University of China.

He said it might add to market complexity by enlarging the money multiplier and introducing more liquidity risks.

Wu Xuchuan, a division head at the central bank's research bureau, said the development of the payment and settlement market would pose a challenge to the central bank, which should respond to this by adjusting monetary policy targets and strengthening regulation in a timely manner.

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