Focus on China’s long-term growth – not on yuan’s short-term fall, top Chinese economist says

Yu Yongding says the Chinese currency has declined against the US dollar but the big issue is to restore confidence in the economy
The major challenge is to sync ‘Covid-19 controls with expansionary policies’

Yuan

Kandy Wong

Published: 7:00pm, 2 Oct 2022

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China should focus on lifting growth and restoring confidence in the country’s economy rather than intervening in the foreign exchange market to try to stem capital outflow risks, according to former central bank adviser Yu Yongding.

In an interview with Shanghai-based news outlet The Paper on the weekend, Yu said the yuan’s depreciation against the US dollar was a short-term issue and the central bank should not set a “red line” for intervention because it would encourage speculators.

He said downward pressure on China’s economy was high and authorities had unveiled expansionary policies to drive growth but Covid-19 controls had limited the impact of those policies.

“US Fed rate hikes have put some pressure on China’s macroeconomic policies. But fundamentally, the challenges are internal,” he said.

“The most important job now is to accelerate economic growth and resolve problems that will affect growth.

“When people gain confidence in the economy, there won’t be massive capital outflows.

“The biggest challenge for us is to coordinate Covid-19 controls and expansionary policies.”

China ‘hits back at the yuan bears’, but new policy steps signal disquiet

The Chinese currency has fallen steadily against the US dollar as the US Federal Reserve has raised interest rates five times so far this year.

Yu said the central bank should make the most of the yuan’s foreign exchange rate flexibility and maintain regular cross-border capital flows, but not focus on the short term.

“There are pros and cons to the depreciation of the yuan against the US dollar but it’s not necessary to let it fully occupy our minds,” he said.

“The long-term rate of the yuan depends on people’s perspectives towards China’s economic system and their confidence about the prospects for growth.”

He said the Fed overestimated the negative impact of inflation but it also underestimated the risk of an economic recession.

It was also not clear if the Fed would continue to scale back asset purchases from the market, which would have implications for other countries.

“China should be on the lookout for inflation in the US and depreciation of the US dollar, but these are not imminent threats,” he said.

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US Federal Reserve authorises another big rate hike in bid to curb inflation

Global financial institutions have lowered forecasts for China’s economy this year, citing disruptions from repeated Covid-19 controls, a property market slump and weakening external demand.

The World Bank forecasts China to grow 2.8 per cent this year, down from the previous estimate of 5.0 per cent. The State Council has repeatedly urged local governments to take immediate action to stabilise the economy.

Beijing has faced persistent pressure to defend the yuan and curb capital outflows, with foreign investors reducing holdings of Chinese bonds by more than 520 billion yuan in the first eight months, according to central bank data.

To that end, the central bank has twice this year lowered the amount of foreign exchange that banks have to set aside in deposits. It has also raised the risk reserve requirement ratio for forward foreign-exchange sales to 20 per cent from zero, increasing purchasing costs to dampen speculative demand.

In addition, the central bank issued a stern warning on Wednesday against one-way bets on the currency’s depreciation and ordered banks to make stabilising the yuan a priority.

The yuan closed at 7.0931 against the US dollar in the onshore market on Friday, trimming losses after Wednesday’s close of 7.2458, the weakest since January 2008.