Veteran watcher: time will tell how well new Beijing yuan formula works
Li Daokui, a former member of the People’s Bank of China’s monetary policy committee, says tweaking the yuan exchange rate formation mechanism won’t damage the central bank’s credibility
A Chinese academic who spent two years on the central bank’s monetary policy committee said the latest tweaking of its yuan exchange rate formation mechanism would not hurt Beijing’s credibility – but only time would tell how well it worked.
As with hiring a new driver, it took “time to observe one’s driving habits”, Li Daokui, a Tsinghua University professor who sat on the People’s Bank of China’s monetary policy committee from 2010 to 2012, told the South China Morning Post at a forum on Thursday. “The new factor, theoretically, is designed to offset the cyclical impacts, but it takes time [to see results],” he said.
The factor’s instalment makes the yuan exchange rate mechanism more complicated and less transparent by giving the central bank a new tool for playing with the daily yuan exchange rate. The central bank said the new factor was designed to address the irrational “herd effect” in the market.
The new countercyclical factor behind the yuan was widely cited as a reason for the currency’s abrupt appreciation in the last days of May. After sharp rallies earlier last week, the yuan-US dollar pair fell slightly in the offshore market on Friday in response to the pickup in the dollar index. The market is wary about the possible impact of the US Federal Reserve’s decisions on rate rises and on unwinding its crisis-era bond holdings.
Li said the biggest uncertainty for the global market was not Fed policies but whether US President Donald Trump could hold power steadily, as Wall Street’s honeymoon period with the abrasive US leader appeared to be over.
Closer to home, Li said China’s 6.9 per cent first-quarter gross domestic product growth indicated the nation’s economy was tracking toward a cyclical recovery. But the government’s effort to crack down on real estate speculation may weigh slightly on economic growth during the second half of the year, he said.
Li forecast that economic growth would gather steam again during the first half of 2018, thanks to spikes in local government investment.
Once a major power reshuffle due in autumn was completed, “local leaders will ratchet up the developing economy as they [will be relatively free of] political burdens”, Li said.
“After the 19th [Communist] Party congress in October, I believe a new round of new policies to pick up the pace of reforms and economic efficiency will be unveiled,” he said. But the financial sector could receive different treatment, given Beijing’s ongoing corruption crackdown and the tightening of financial supervision to sort out disorderly transactions and control the country’s hefty debt burden, Li said.