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Scholar suggests free-floating yuan as economic conditions stabilise: paper

[SHANGHAI] China should allow its currency to float freely as soon as possible with stable economic conditions allowing a window of opportunity to pursue exchange rate reforms, an influential government researcher told state media on Monday.

The comments from Yu Yongding, a scholar at the China Academy of Social Sciences and former central bank adviser, come amid signs of stability in yuan trade and with cross-border capital flows improving over the past few months.

"Conditions for changing to a floating exchange rate regime are basically qualified," the official China Securities Journal quoted Mr Yu as saying.

The Chinese yuan has strengthened against the US dollar over the past few months with the onshore spot rate booking its best month on record in August.

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"Signs of improvements in China's economy are obvious, international capital payments are balanced, expectations for depreciation in the yuan have basically faded, and various measures of capital controls are already in place," he said.

In the same article, Mr Yu also said the introduction of a "counter-cyclical factor" into the official midpoint formula in May did not accurately reflect supply and demand in the foreign exchange market.

The People's Bank of China (PBOC) added what it described as the "counter-cyclical factor" to its formula for the yuan's mid-point calculations in late May, a move widely seen as an attempt to stem speculation.

The PBOC said in its second quarter monetary policy report that the change would make the exchange rate regime more transparent, more market-oriented and rule-based. However, analysts say their ability to forecast the currency's moves has diminished as a result of the changes.

"The pricing of the yuan exchange rate remains affected by the central bank's intervention in the market," he said. He added reforms should increase the weighting of the previous day's official local close in the midpoint formula, rather than decrease the weighting, which is how the midpoint is currently determined.