China should allow its currency to rise or fall by as much as 10% a day against the dollar a tenfold expansion of the current trading band a leading economist who used to be a member of the central banks monetary policy committee said on Thursday.
Yu Yongding told Emerging Markets in an interview in Manila that 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 14 April.
However Yu, who is also a former Director-General at the Institute of World Economics and Politics, said 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 told Emerging Markets. 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 said: 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 Chinas current account surplus was projected to narrow to around 2% in the coming years, he said.
He said the economys 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 said.
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 it exporters would take a knock, Yu said.
The reduction in Chinas current account surplus is one good measure that helps to support Beijings view that the exchange rate is close to its fundamental, market-implied value, ADB chief economist Changyong Rhee told Emerging Markets.
Official Chinese manufacturing PMI 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 said 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.
Chinas 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 said.
In order for investment spending to rise only in line with Chinas trend growth rate, domestic consumption growth would need to represent some 2% of Chinas annual economic expansion. Failure to engineer this would cause a hard landing, he said.
Michael Pettis, finance professor at Peking University, and a well known China bear, told Emerging Markets that China could not liberalize the interest rate regime without triggering a banking crisis.