China’s decision to widen the yuan’s trading band against the dollar means investors can play a bigger role in determining the value of the currency, People’s Bank of China deputy Governor Yi Gang said.
“It’s time to let the market more or less decide the exchange rate while reducing the intervention on the market,” Yi said yesterday at an event in Washington, where he’s attending the spring meetings of the International Monetary Fund. He said market forces have already played an “important role” in determining the currency’s value, which has been a “persistent two-way bet” for some time.
China this month doubled the yuan’s trading band to 1 percent from 0.5 percent, the first widening since 2007. The yuan has weakened 0.2 percent against the dollar this year after rising 31 percent since July 2005 when the government abandoned a peg to the U.S. currency.
Premier Wen Jiabao said on March 14 the yuan may be near an “equilibrium” as export growth slows and the government promotes policies to boost imports and consumption. The nation in February posted the biggest monthly trade deficit since at least 1989. The 12-month non-deliverable forwards showed traders are betting the yuan to be little changed from 6.3086 per dollar on April 20, according to data compiled by Bloomberg.
Current Account Surplus
China’s surplus in the current account, the broadest measure of trade and services, has dropped to 2.8 percent of gross domestic product last year from 10.1 percent in 2007, a reversal that was “sharper and more persistent than expected,” IMF staff wrote in a working paper this month.
Two thirds of the decline in the surplus was “structural” as rising labor costs and a stronger currency erode exports’ competitiveness, according to Yi. The rest of the decline was due to the “cyclical” drop in demand from Europe and the U.S., he said.
A more balanced trade portfolio reduces the needs for the central bank to intervene in the currency market to offset dollar inflows, according to Yi, who is also head of China’s State Administration of Foreign Exchange. China has amassed $3.3 trillion in foreign reserves, which is the world’s largest and equivalent to the size of the German economy.
“It doesn’t make sense to continue to accumulate reserves,” as imports surge, said Yi. China’s imports may double to $4 trillion by 2020 from an estimated $2 trillion by year-end, he said.
Yi said China is a “long-term, responsible investor” in the U.S. Treasury market. China is the largest creditor to the U.S., holding $1.2 trillion in Treasuries as of February.
Since the U.S. is the largest fixed income market, “it’s very natural to invest quite a large proportion” of China’s reserves in Treasuries, he said. “That’s completely a market decision.”
At the same meetings, central bank Governor Zhou Xiaochuan said China supports boosting the IMF’s lending resources even as it pushes the Washington-based lender to continue implementing a promised overhaul of the quota system that determine members’ power and voting rights.
Zhou said China’s growth outlook “remains positive” after the world’s second-biggest economy expanded 8.1 percent in the first quarter.
While “near-term” inflation pressure have “moderated,” policy makers remain “vigilant” amid “ample global liquidity,” he added.