Daily trading band will be widened to help smooth capital flows, build platform for economic activities

China is poised to take yet another step in making the yuan a free-floating currency, according to central bank Governor Zhou Xiaochuan.

The People's Bank of China, the country's central bank, intends to further widen the yuan's daily trading band as it boosts the currency's convertibility, Zhou was quoted as saying by Bloomberg in a newly published book explaining the reform guideline outlined last week following a meeting of the Party leaders.

China currently provides a daily reference rate for the yuan to the foreign exchange market as it seeks a stable exchange rate for the fast-growing yet nascent market economy. Daily fluctuation is now at 1 percent north and south of the reference rate, after being widened last year from 0.5 percent, and 0.3 percent in 2007.

"A freer yuan is compatible with the reality in the foreign exchange market," says Lian Ping, chief economist with the Bank of Communications in Beijing.

China's capital flow has evolved into two-way movement, he says, and a yuan able to move in a wider range will help smooth capital flows and lay a better foundation for real economy activities.

Wang Jianhui, chief economist with Southwest Securities Co, says that unshackling the yuan will come in phases, and the currency won't float freely at the beginning.

"Any reforms will proceed in baby steps. That's how they do things in the central bank," he says.

In the book, Zhou also promised to cancel volume limits on trial programs that give foreign fund managers access to Chinese capital markets and Chinese managers to foreign markets, as it speeds up efforts to boost the yuan's convertibility.

"China will speed up the process for the yuan to become fully convertible and strengthen supervision on hot money," Zhou says.

Quotas under the qualified foreign institutional investor program and the qualified domestic institutional investor program will be expanded and then erased, Zhou says.

The yuan is fully convertible under the current account, which registers trade-related fund flows. Under the capital account system, though, the country subjects a few types of payments to administrative approval, over fears that excess speculation in financial markets will unsettle stability.

The central bank has talked about making the country's capital account more convertible for quite some time, but analysts believe that it's ready to take bigger steps now that the 60-point reform blueprint published last week promises to open up the financial industry.

A ceiling on deposit rates offered by Chinese banks also will be phased out, PBOC Deputy Governor Yi Gang wrote in the book.

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