Widen RMB trading band to 10% - ex-PBoC adviser
China should allow its currency to rise or fall by as much as 10% a day against the dollar, a former member of the People's Bank of China (PBoC) monetary policy committee tells Emerging Markets, a sister publication of EuromoneyFXNews.
Yu Yongding says such a change would be “no big deal” and that the move should be part of wider exchange-rate liberalization. Beijing widened its currency trading band by 0.5% to 1% on April 14.
However, Yu, a former director-general at the Institute of World Economics and Politics, says the country should not give up capital controls.
“Widening the trading band by 5% to 10% on either side is not a big deal but the frequency of setting the central rate is an issue for importers and exports,” he says in an interview from Manila. “I would like to see the exchange-rate regime more liberalized but China should not give up capital controls.”
Asked when China should implement such a move, he says: “First, they should consider the impact of the 1% and then see.”
The move would not trigger a “significant” appreciation of the currency since the renminbi is close to its “equilibrium value”, while China’s current-account surplus was projected to narrow to around 2% in the coming years, he adds.
He says the economy’s recent resilience provided policymakers with some breathing room to retool its growth model. “The longer we delay with these reforms, the more difficult the restructuring of the economy will be,” he says.
A more flexible exchange rate – accompanied by a continuation of capital controls – would allow the economy to allocate savings more efficiently and boost domestic consumption, though its exporters would take a knock, Yu says.
The reduction in China’s current-account surplus is “one good measure” that helps to support Beijing’s view that the exchange rate is close to its fundamental, market-implied value, says Asian Development Bank chief economist Changyong Rhee.
The official Chinese manufacturing Purchasing Managers’ Index rose to 53.3 last month, its highest in more than a year, fuelling optimism that Chinese policymakers would engineer a soft economic landing.
Yu says this economic data underscored how monetary policy should remain on an upward trajectory and the eurozone crisis “is not the most important factor” that should influence the monetary cycle.
China’s current account surplus fell to 2.8% in 2011 from as high 10% in the 2007 to 2008 period, driven by higher investment spending and slower exports rather than growing consumption. China faces a key challenge in increasing domestic consumption without causing a hard landing for the economy, Yu says.
For investment spending to rise only in line with China’s trend growth rate, domestic consumption growth would need to represent some 2% of China’s annual economic expansion. Failure to engineer this would cause a hard landing, he adds.
Michael Pettis, finance professor at Peking University, and a well-known China bear, says China could not liberalize the interest-rate regime without triggering a banking crisis.