• Policy change might lead to 20% devaluation: Yu Yongding
  • Sees U.S. pressure deterring China from freeing up rate

China should quietly allow wider moves in the yuan, a strategy that will reduce the cost of limiting declines, although U.S. 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 Friday 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.”

Yu Yongding
Yu Yongding
Photographer: Nelson Ching/Bloomberg

The yuan will likely depreciate as much as 20 percent on such an adjustment--mostly driven by capital outflows triggered by higher U.S. 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 Friday 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.

Basket Falls

A Bloomberg replica of the CFETS RMB Index has declined 3.7 percent so far this year, as the PBOC nudged a decline to combat a decline in exports. The U.S. Treasury Department said last month that it is putting economies including China, Japan and Germany on a new currency watch list to gauge whether they provide an unfair trade advantage.

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 U.S.,” he said. “According to them (U.S. officials) China’s side has promised it will maintain exchange-rate stability, I don’t know whether the PBOC has done it or not.”

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