Beijing will not bow to pressure on yuan, adviser says
But there is still room for a more flexible exchange rate, a former central banker tells Cary Huang
Mainland authorities will resist foreign pressure to allow the yuan to appreciate faster but should undertake reforms to make the foreign-exchange, trade and foreign direct investment regimes more flexible, says a leading government adviser.
Xia Bin, director-general of the Finance Research Institute of the State Council's Development Research Centre, ruled out any sharp adjustments to the yuan's exchange rate in the foreseeable future, and said Beijing would adhere to the principle of allowing the currency to move in a stable, gradual and controllable manner.
Speaking on the eve of the first anniversary of China's decision last July 21 to delink the yuan from its peg to the US dollar and revalue the currency by 2.1 per cent, Professor Xia said Beijing viewed the measure as a success. But he said there was still room for a more flexible exchange-rate system and further appreciation. He forecast the yuan would appreciate a further 2 to 3 per cent by the end of the year.
The yuan rose by about 3.5 per cent against the dollar in the year to June 30, but mainly because the dollar weakened against other major currencies.
'There is room for a more flexible exchange regime, for more appreciation of the yuan and a wider trading range on a daily basis,' Professor Xia said.
He said authorities could undertake faster reforms to address the country's economic and trade imbalances.
Professor Xia said many of the open-door policies initiated by late leader Deng Xiaoping, in place since late 1979, were outdated because the Chinese and the global economies had changed significantly. 'These policies were mainly designed to attract foreign capital, and now we are not lacking money. Instead, we are bothered by too much money and how to spend it.
'The government should conduct a thorough review of all the policies concerning China's foreign-exchange management, foreign investment and foreign trade implemented since 1979, and make proper adjustments,' he said.
The rectification of domestic and global imbalances required comprehensive efforts by the Chinese and foreign governments, though Beijing's adjustment of its foreign business-related policies would be helpful, he said.
China's economy, powered by investment and exports, and fuelled by excess liquidity and credit, expanded 11.3 per cent in the second quarter. This prompted calls for tougher action - such as letting the yuan strengthen - to prevent the world's fourth-biggest economy from overheating.
China had overtaken Japan as the world's richest nation in terms of foreign-exchange reserves by the end of February. The mainland's foreign-exchange reserves reached a record US$941.1 billion by the end of last month, up 32.37 per cent on the same month last year, the central bank said on Friday.
Professor Xia said the government should shift its focus from attracting foreign capital to attracting advanced technology and management expertise. 'Our policies should be adjusted to encourage all capital that would bring in advanced technology and management skills, and discourage all investment that could not bring in this expertise.' Professor Xia warned global imbalances would continue for some time, and said Washington had overestimated the impact of the yuan's appreciation in helping reduce its trade deficit.
Economists attributed the soaring foreign reserves to the growing surplus of capital and current accounts in international payments, and the inflow of hot money betting on a further appreciation of the yuan. The mainland's trade surplus in the first half of the year reached US$61.45 billion, up 54.9 per cent compared with the first half of last year. Expectations of a further yuan appreciation remain strong, because the central bank's massive dollar purchases are adding to the excess liquidity in the banking system, a situation blamed for overheating in the economy.
Professor Xia, a former senior central banker, said the government should introduce a more flexible foreign exchange regime and allow the yuan to move in a wider range on a daily basis.
Economists expect China's reserves to reach US$1 trillion by the end of the year.