China economy

China should defend the yuan at 7 to the US dollar, central bank adviser says

  • If currency’s value falls below this ‘crucial point’, cost of stabilising exchange rates will be much greater, Sheng Songcheng says
PUBLISHED : Saturday, 15 December, 2018, 2:51pm
UPDATED : Tuesday, 18 December, 2018, 12:11pm

China should not allow the yuan to fall below 7 to the US dollar or attempts to stabilise the currency will become more costly on the country’s foreign exchange reserves, an adviser to the People’s Bank of China said on Saturday.

Policy insiders said in October that China was likely to use its vast currency reserves to stop any precipitous fall through the psychologically important level of 7 yuan per dollar because it could risk triggering speculation and heavy capital outflows.

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“If we fall below this crucial point, then we will have to pay a greater cost to stabilise exchange rates,” Sheng Songcheng told a forum in Shanghai, according to financial media website, the event’s organiser.

Stabilising the exchange rate would require significantly less of China’s foreign exchange reserves when the yuan was at 6.7 or 6.8 per dollar but the amounts required would rise sharply if the rate fell below 7, he said.

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To spend a certain amount now to defend the exchange rate was actually a means of preserving reserves because, if the market expected a fast devaluation, reserves would then be unable to prevent a drop in value, Sheng said.

“The most important thing for us right now is to stabilise exchange rates and is not so-called exchange rate reform or the internationalisation of the renminbi,” he said.

The Chinese currency has lost nearly 7 per cent of its value to the dollar since the start of the year and is approaching the 7 per dollar level, which was last hit during the global financial crisis in 2008.