May 5, 2011PBOC Should Reduce Intervention in Currency Market, Yu Says
China’s central bank should reduce intervention in the foreign-exchange market to better reflect market demand for the yuan, Yu Yongding, a former academic adviser to the People’s Bank of China, said today.
“China has the conditions for a one-off appreciation although it must be accompanied by some other measures, such as strengthening management of cross-border capital flows” to curb speculation, Yu said in an interview in Beijing. He didn’t elaborate.
The nation’s foreign-exchange reserves climbed by the second-biggest amount on record in the first quarter to $3 trillion as the PBOC bought currencies including the U.S. dollar from banks to control the yuan’s gains. The nation’s holdings have exceeded a “reasonable level,” central bank Governor Zhou Xiaochuan said last month.
The yuan, which hit a 17-year high on April 29, fell 0.01 percent to 6.4937 per dollar at 4:30 p.m. in Shanghai, paring earlier declines. The currency has gained 0.5 percent in the past seven trading days and 5.1 percent in the last 12 months.
Yu said the PBOC’s frequent intervention in the foreign exchange market to maintain a stable exchange rate with the U.S. dollar “isn’t a good deal” because the growth in reserves will lead to higher capital losses as the dollar weakens over time.
Letting the yuan appreciate “would bring more benefit than harm to China’s economy”, said Yu, former head of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences.
Widening Band
*The exchange rate should be among the tools the government can use to fight inflation, Yu said in a speech today at the publication of the United Nations’ economic and social survey of Asia and the Pacific. Widening the yuan’s trading band is one option to make the currency more flexible, he said.
In a China Daily commentary on April 2, Yu suggested the International Monetary Fund’s Special Drawing Rights, a basket of four major currencies, as a possible replacement to the dollar as a reserve currency, saying the U.S. is “printing” its way out of its economic problems.
Still, “conditions are not yet ripe” for the yuan to be included in the basket because it is still not widely used in international trade, he said today.
“While China has made some progress in internationalizing the yuan, the move has been mostly driven by government policies rather than a reflection of real market demand,” he said.
Yuan Internationalization
*The nation’s leaders have been pushing for greater use of yuan in international trade settlement. The central bank has reached agreement for currency swaps with counterparts in countries including Mongolia, New Zealand and Uzbekistan.
Countries including the U.S. have said the yuan shouldn’t be included in the IMF’s basket until the currency is fully convertible. The yuan is now only convertible on the current account for trade and investment purposes.
Yu said today full convertibility shouldn’t be a condition for inclusion in the SDR basket and there’s no timetable to achieve that goal, which should be “the last step of China’s ongoing economic reform.”
Consumer prices in China jumped 5.4 percent in March, the biggest increase in 32 months, and have gained by more than the government’s 4 percent target every month this year. Inflation may have eased to 5.2 percent in April, according to the median forecast in a Bloomberg News survey of 25 economists.
Over Tightening Risk
China’s central bank should reduce intervention in the foreign-exchange market to better reflect market demand for the yuan, Yu Yongding, a former academic adviser to the People’s Bank of China, said today.
“China has the conditions for a one-off appreciation although it must be accompanied by some other measures, such as strengthening management of cross-border capital flows” to curb speculation, Yu said in an interview in Beijing. He didn’t elaborate.
The nation’s foreign-exchange reserves climbed by the second-biggest amount on record in the first quarter to $3 trillion as the PBOC bought currencies including the U.S. dollar from banks to control the yuan’s gains. The nation’s holdings have exceeded a “reasonable level,” central bank Governor Zhou Xiaochuan said last month.
The yuan, which hit a 17-year high on April 29, fell 0.01 percent to 6.4937 per dollar at 4:30 p.m. in Shanghai, paring earlier declines. The currency has gained 0.5 percent in the past seven trading days and 5.1 percent in the last 12 months.
Yu said the PBOC’s frequent intervention in the foreign exchange market to maintain a stable exchange rate with the U.S. dollar “isn’t a good deal” because the growth in reserves will lead to higher capital losses as the dollar weakens over time.
Letting the yuan appreciate “would bring more benefit than harm to China’s economy”, said Yu, former head of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences.
Widening Band
*The exchange rate should be among the tools the government can use to fight inflation, Yu said in a speech today at the publication of the United Nations’ economic and social survey of Asia and the Pacific. Widening the yuan’s trading band is one option to make the currency more flexible, he said.
In a China Daily commentary on April 2, Yu suggested the International Monetary Fund’s Special Drawing Rights, a basket of four major currencies, as a possible replacement to the dollar as a reserve currency, saying the U.S. is “printing” its way out of its economic problems.
Still, “conditions are not yet ripe” for the yuan to be included in the basket because it is still not widely used in international trade, he said today.
“While China has made some progress in internationalizing the yuan, the move has been mostly driven by government policies rather than a reflection of real market demand,” he said.
Yuan Internationalization
*The nation’s leaders have been pushing for greater use of yuan in international trade settlement. The central bank has reached agreement for currency swaps with counterparts in countries including Mongolia, New Zealand and Uzbekistan.
Countries including the U.S. have said the yuan shouldn’t be included in the IMF’s basket until the currency is fully convertible. The yuan is now only convertible on the current account for trade and investment purposes.
Yu said today full convertibility shouldn’t be a condition for inclusion in the SDR basket and there’s no timetable to achieve that goal, which should be “the last step of China’s ongoing economic reform.”
Consumer prices in China jumped 5.4 percent in March, the biggest increase in 32 months, and have gained by more than the government’s 4 percent target every month this year. Inflation may have eased to 5.2 percent in April, according to the median forecast in a Bloomberg News survey of 25 economists.
Over Tightening Risk
There is no need to be “overly worried” about consumer- price gains, Yu said today. Inflationary pressure remains high “but is controllable this year,” he said. While it will be difficult for the government to keep inflation within its 4 percent target, limiting the growth in consumer prices to under 5 percent is “achievable,” he said.
Rising labor costs will have put greater pressure on inflation over the next few years, Yu said.
The nation’s economic growth can exceed 9 percent this year although it faces uncertainties including the risk of over tightening, which may lead to a sharper downturn in economic growth, Yu said.
The government should also stay vigilant of any rebound in property prices, which may add to the risks of a re-acceleration in economic growth, he said.
Rising labor costs will have put greater pressure on inflation over the next few years, Yu said.
The nation’s economic growth can exceed 9 percent this year although it faces uncertainties including the risk of over tightening, which may lead to a sharper downturn in economic growth, Yu said.
The government should also stay vigilant of any rebound in property prices, which may add to the risks of a re-acceleration in economic growth, he said.
