China Must Cut Yuan Intervention, ex-PBOC Adviser Says

China should rein in yuan intervention and let the currency advance to curb growth in its $3.95 trillion foreign-exchange reserves, according to a former central bank adviser and the nation’s biggest investment bank.

Markets forces should determine the exchange rate so long as there are “controls on speculative, short-term capital flows,” Yu Yongding, the former adviser, told Bloomberg News in an interview on the sidelines of a conference in Shanghai. “China can no longer bear the cost of forex reserves, so just let the yuan appreciate,” Liang Hong, vice chairman of the capital markets committee of China International Capital Corp., said at the conference.

The comments echo the view of the U.S. Treasury Department, which two days ago released a semiannual report that called on China to intervene less and let markets play a greater role in determining the yuan’s value. Dollar purchases to weaken the yuan are contributing to the buildup of China’s foreign reserves, which surged by $128.7 billion in the first quarter after a record annual jump of $509.7 billion in 2013. The holdings lose value in yuan terms as China’s currency advances.

The yuan strengthened 37 percent versus the dollar from when a dollar peg was scrapped in July 2005 to the end of last year, the best performance among 24 emerging-market currencies tracked by Bloomberg. So far in 2014 it has weakened 2.7 percent, the biggest loss among Asia’s 11 most-used currencies.

China Intervention

The People’s Bank of China doubled the yuan’s trading band on March 17 to allow moves of as much as 2 percent on either side of a daily fixing. The monetary authority “took measures, including reported heavy intervention, to significantly weaken” the currency in the month leading up to the change, the Treasury said in its April 15 report.

China is pushing forward on exchange-rate reforms in a “bold” fashion, while adopting a more gradual approach toward loosening controls over interest rates and capital markets, PBOC Deputy Governor Yi Gang said on April 10. Efforts to hold down the value of the yuan against the dollar give Chinese exporters an edge over U.S. competitors.

China’s currency retreated today in Shanghai as the central bank weakened its reference rate and housing data fanned concern about a slowdown in the world’s second-largest economy. New-home price increases moderated across the country last month and gross domestic product rose the least in six quarters in the January-March period, reports showed this week.

The currency slipped 0.08 percent to close at 6.2242 per dollar, China Foreign Exchange Trading System prices show. The spot rate was at a 1.05 percent discount to the central bank’s fixing, which was weakened by 0.02 percent to 6.1586.

“The yuan is under pressure to weaken amid concern about the Chinese growth,” said Tsutomu Soma, manager of the fixed-income business unit at Rakuten Securities Inc. in Tokyo. “Monetary authorities are also making sure that investors will see two-way moves in preparation for the internationalization of the currency.”

— With assistance by Helen Sun

(Corrects date of Treasury report in fifth paragraph of story published April 18.)
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