PBOC should allow bigger yuan moves: Ex-adviser

BLOOMBERG

China should quietly allow wider moves in the yuan, a strategy that will reduce the cost of limiting declines, although US pressure against a big devaluation will be a deterrent, according to a former People’s Bank of China adviser.
“The currency basket should be allowed to fluctuate within a big band, at least 20 percent,” Yu Yongding said in Singapore, referring to an index of 13 currencies of China’s trading partners tracked by the PBOC. “China does not need to disclose this band, keep it to yourself. Markets would speculate, and guess.”
The yuan will likely depreciate as much as 20 percent on such an adjustment — mostly driven by capital outflows triggered by higher US interest rates — and downward pressure would be reduced, Yu said in an interview on the sidelines of an economics conference.
“Because you stopped intervention, you are then free to use your ammunition,” said Yu, now a senior research fellow at the Chinese Academy of Social Sciences. “China still has $3 trillion, who dares to attack against that?” he added, referring to China’s foreign-exchange reserves, the world’s largest stockpile.
His comments came just as the PBOC said last week that it has continuously increased the two-way flexibility of the yuan’s exchange rate.
The monetary authority controls the onshore currency by setting a daily reference rate, which limits moves to 2 percent on either side.
Yu said the political factor is one reason the PBOC is likely to maintain its current policy of intervention.
“They pay attention to the pressure of the US,” he said. “According to them (US officials) China’s side has promised it will maintain exchange-rate stability, I don’t know whether the PBOC has done it or not.”