Xinhua Says Yuan Debate Focus Should Be How Level Is Set

The debate over the yuan’s exchange rate should focus on the mechanism by which the currency’s level is set, not its actual valuation, China’s official Xinhua News Agency wrote in an unsigned commentary yesterday.

The goal should be on “perfecting” the exchange-rate mechanism to guide the yuan to a “dynamic” equilibrium, not on the numerical value of the currency, Xinhua writes. Lawmakers and economists find it “hard to determine” whether the yuan is over- or undervalued, given that the exchange rate has many influences, including foreign trade, capital flows and growth prospects, Xinhua said.

“Losing the real focus of the debate would lead to unreasonable acts such as the obsession of some U.S. politicians in pressing for a drastic appreciation of the renminbi, or domestic resistance to any appreciation of the Chinese currency,” Xinhua wrote. “In both cases, there will be a ‘lose-lose’ situation for both nations.”

People’s Bank of China Deputy Governor Yi Gang said during an International Monetary Fund meeting last month that the yuan’s trading band will be widened “in the near future.” The currency is currently allowed to trade 1 percent on either side of an official fixing. The central bank doubled the band a year ago from 0.5 percent, the first widening since 2007.

U.S Treasury Secretary Jacob J. Lew said last month that China is making “some progress” on allowing the yuan to strengthen and that he is watching the country’s currency movements “very carefully.” Lew said he has told China’s new leaders that they need to “expand the band” in which the yuan trades.

Morgan Stanley boosted its year-end forecast for the yuan to 6.1 per dollar from 6.3 this week, citing prospects for trading-band expansion and an increase in market participants.

The yuan rose for a ninth week, advancing 0.2 percent to 6.1556 per dollar to cap the longest stretch of weekly gains since November. The PBOC cut the daily fixing by 0.11 percent to 6.2152 per dollar yesterday after raising it by 0.2 percent May 2.

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