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China yuan band widening a sign of caution, not reform zeal

Paradoxical as it may sound, China's move to give the yuan more wiggle room is a sign of caution and deepening concern about the slowing economy rather than a promise of Beijing's vigorous pursuit of market reforms, government economists say.

The move itself was no big surprise, although by doubling the currency's trading band the central bank went a bit further than many had expected and acted a bit sooner than some thought.

(Read more: China's yuan takes first big swing in wider band)

Yet many took that as a reassurance the broad financial liberalization promised at a key leadership gathering last year was on track, including the expected removal of controls on deposit rates.

However, government economists and policy advisers involved in internal policy discussions told Reuters that of all the possible policy steps, the central bank chose one considered least risky and which also offered it a way to hedge against further economic slowdown.

Adam Young | Flickr | Getty Images

After a string of weak economic data casting doubt on Beijing's 7.5 percent growth target for this year and signs of financial strains in some industries and the financial sector, Beijing is now less willing to accept the short-term pain.

"The band widening was an easier step. Removing the ceiling on bank deposit rates needs more preparations and it's unlikely to happen this year," said a senior economist at the Chinese Academy of Social Sciences (CASS), a top government think-tank.

"It could be at the last of the reform sequence, as the economy faces relatively big downward pressures," said the economist, who requested anonymity due to the sensitivity of the issue.

On Wednesday, Premier Li Keqiang indicated officials were looking to support the economy, including by speeding up investment and construction.

(Read more: Yuan's fall may leave some exposed to heavy losses)

"We need to seize the time to implement measures that we have determined in expanding domestic demand and stabilizing economic growth," he told a cabinet meeting, official media reported.

Central bank chief Zhou Xiaochuan said last week that deposit rates are likely to liberalized in one to two years – the most explicit timeframe to date, and warned that deposit rates could climb as a result of liberalization.

The insiders told Reuters the People's Bank of China (PBOC) chose to go ahead with the trading band widening because it is increasingly wary of the impact from thornier changes, such as freeing up bank deposit rates and loosening capital controls.

"The biggest problem is in the financial system. Monopolies create rent-seeking and high borrowing costs despite ample money supply," said Wang Tianlong, an economist at think-tank China Centre for International Economic Exchanges (CCIEE).

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