Yuan's Capital Flight-Induced Slide Bodes Ill for China's Economy, Ex-PBOC Advisor Says
Yicai Global
/SOURCE : Yicai
Yuan's Capital Flight-Induced Slide Bodes Ill for China's Economy, Ex-PBOC Advisor Says

(Yicai Global) Dec. 19 -- "Devaluation of the Chinese yuan caused by capital outflow will pose a serious threat to the Chinese economy in 2017," said a former advisor to China's central bank.

China will adopt a more active fiscal policy next year, which will expose the country to increased pressure from capital flight, Yu Yongding, a member of the Chinese Academy of Social Sciences, said at an academic forum yesterday.

"We'll lose more foreign reserves if we cling on to exchange rates, and when foreign reserves drop below the threshold, we'll only face greater pressure to devalue," he said.

On Dec. 16, the yuan slipped below 6.95 against the dollar in onshore trading, and closed at 6.9430 offshore. The yuan's central parity rate moved below 6.95, hitting a new eight-year low.

China's foreign exchange reserves fell USD69.1 billion, or 2.2 percent, to USD3.05 trillion in November from the month before, the steepest drop since January's USD99.5 billion plunge, according to figures released by the People's Bank of China on Dec. 7. Forex reserves also shrank for the fifth month in a row in November.

To keep the risk of devaluation in check, Yu suggested reigning in the government's exchange rate intervention and improving regulation of cross-border capital movements.

US economic growth will accelerate in 2017, Yu said, and the Federal Reserve will very likely hike interest rates for a third time next year. Higher borrowing costs in the US will drive up dollar indexes at least for a certain period of time in 2017. China will adopt a more active fiscal policy next year, and exchange rates will not fluctuate drastically. But China will face greater pressure from capital flight, he said.

Yu stressed that given China's significant current account surplus and high economic growth rate, the yuan will not depreciate over the long term, but rather it should be a strong currency. Still, he noted that at this stage it is hard to tell how long the 'long term' would be, but short-term downward pressure and devaluation expectations are a given fact that should not necessarily lead to an economic or financial crisis. What is at stake now is to tackle them with effective policies.

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