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China Economy

China should ‘stand back and let yuan fall against US dollar before Trump takes office’

Chinese government adviser says authorities trying to control drop in currency’s value are wasting nation’s hard-earned foreign reserves

PUBLISHED : Wednesday, 23 November, 2016, 10:08am
UPDATED : Wednesday, 23 November, 2016, 11:37pm

An influential government ­adviser says Beijing should stop intervening to control the value of the yuan and instead allow a fall in the currency’s exchange rate ­before Donald Trump takes office as US president at the end of ­January.

Yu Yongding, a senior fellow at the Chinese Academy of Social Sciences, wrote in a co-authored article published in the Shanghai Securities News that the Chinese currency was likely to depreciate against the US dollar in the coming months.

As a result, he argued that Beijing should permit the yuan to fall as much as the markets dictated while maintaining controls on the flow of capital in and out of the country.

Yu, who was the only academic on the central bank’s monetary policy committee when Beijing removed the yuan’s peg to the value of the dollar in 2005, wrote: “Over the next few months, the possible increase of returns on dollar assets … and capital outflows will bring in bigger depreciation pressure on yuan.

Chinese yuan touches lowest level in eight years

“From now until president-elect Donald Trump officially takes office is a good window period to abandon market intervention and let the yuan fully release its depreciation pressure.”

Yu and fellow author Xiao Lisheng said the central bank’s present strategy of trying to manage a gradual and controlled fall in the value of the yuan was backfiring and wasting China’s hard-earned foreign exchange reserves.

The refusal to allow the yuan to depreciate in full, objectively speaking, is failing to increase the cost of capital flight. Rather it could encourage it
Yu Yongding, economist

The reserves have shrunk by about US$800 billion from their peak in June 2014.

“The refusal to allow the yuan to depreciate in full, objectively speaking, is failing to increase the cost of capital flight. Rather it could encourage it,” Yu wrote.

“The yuan’s fast weakening in recent weeks didn’t split market expectations on its depreciation, but has intensified it to some extent,” the article said.

“Such consistent expectation has seriously limited monetary policy operations of the central bank.”

The fall in the yuan against the US dollar has accelerated in recent weeks. It is now trading at about to 6.9 to the greenback, the weakest level in eight years.

While Yu has extensive contacts with the country’s decisionmakers and is a widely respected academic, there is no guarantee that his suggestions will be formally adopted.

As the yuan has weakened against the dollar, the central bank has tried to steer market attention to the fact that the yuan has been stable “against a basket of currencies”.

Chinese yuan extends its decline after US hints at rate increase

Yu said China could manage any fallout from a depreciation of the yuan as long as the authorities were able to maintain capital ­account controls.

He argued that China’s economic fundamentals meant it was unlikely the currency would fall 20 or 25 per cent.

“Has there ever been a case in the history of the world economy of a nation’s currency losing 20 or 25 per cent of its value when the country has the world’s largest trade surplus, one of the fastest economic growth rates, the world’s biggest forex reserves and much higher financial investment yields than the United States?” Yu asked rhetorically in the article.

But he said controls on the flow of capital in and out of China had to be in place as the central bank’s last line of defence.

“Tightening capital controls is absolutely correct. For now, they must be tightened not weakened,” Yu wrote.