Stop Yuan Rate Intervention Before Trump Takes Over, Ex-PBOC Economist Says
Yicai Global
/SOURCE : Yicai
Stop Yuan Rate Intervention Before Trump Takes Over, Ex-PBOC Economist Says

(Yicai Global) Dec.9 -- "Before Donald Trump becomes US president, China should abandon its intervention in the yuan exchange rate," Yu Yongding, a former member of the Monetary Policy Committee of the People's Bank of China (PBOC) said recently.

He said the market was always priced based on observations and anticipations of future policy ahead of the curve in actual developments. Expectations for Trump's active fiscal policy have boosted the dollar, but to say it would further go up short term is problematic, though yuan devaluation pressure should rise, he feels.

Trump has threatened to flag China as a currency manipulator, but the US Treasury opposes this tag. Yu said that elites with economic awareness in the US want China to control yuan devaluation -- or 'manipulate the exchange rate' -- to cushion its impact on the US. He asked rhetorically whether, if China refrains from yuan exchange rate intervention and lets the rate fluctuate per market supply and demand, would Trump still say China was fiddling it?

For example, from 1995 to 1998, the yen dropped from 80 to 145 against the dollar. The start of this century also saw significant depreciation. Tokyo insisted that this resulted from Japan's capital outflows, not government action, and thus the US had no effect.

Yu said using foreign exchange reserves to maintain exchange rate stability would not be helpful. Although China holds massive foreign-exchange reserves, these should not be used in that way, he believes.

He said: "To lose nearly USD1 trillion in forex in less than two years was very terrible. The swift decline of forex reserves shows the unsustainability of current exchange rate policy. The claim that it would cause a gradual venting of yuan devaluation pressure seems to hold some truth, but it could also occasion many problems and high costs.

Many investment professionals have also recently expressed concerns over tightened capital controls, but he these he thinks are needed. Under the currently immature conditions, to hasten capital account liberalization before the emergency brake engages would inevitably worsen present problems.

When conditions are unripe, promoting capital projects in a hurry and then hitting the brakes is bound to aggravate the situation.

Yu said that the fundamentals of the Chinese economy do not support significant yuan depreciation. China, moreover, also has the ultimate means of capital control.

As the country with the world's largest trade surplus, China's economic growth has soared above the global average, so with the most forex reserves, and financial asset returns higher than the US, a 20-25% drop in the yuan's value is out of the question, he said.

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