China should give top priority to domestic economic growth rather than defending the yuan exchange rate, says a former senior official with China’s foreign exchange regulator, in a fresh sign that Beijing is willing to tolerate further fluctuation of the yuan.
“If there is conflict between growth and exchange rates, China’s monetary policy should give priority to growth,” Guan Tao, a former departmental head of the State Administration of Foreign Exchange, said in an interview with the official China Securities Journal published on Monday.
Guan, who was director general of the balance of payments department of the top forex regulator from 2009 to 2015 and is now a researcher on the Chinese economy and exchange rate policy, said Beijing is now using a trio of policies to handle capital outflow and yuan depreciation. These are to set the yuan exchange rate against a basket of currencies, conduct modest interventions in the foreign exchange market and impose capital account control.
It is an impossible mission for Beijing to keep the yuan exchange rate stable and also maintain the size of its foreign exchange reserves, Guan said.
Beijing’s official foreign exchange reserves shrank US$800 billion during the past two years and the world’s largest stockpile of foreign exchange is melting at an alarming rate, especially after China shocked the world by devaluing the yuan by 2 per cent in August 2015.
The Chinese authorities are getting increasingly harsh on capital outflow by imposing added restrictions. In the latest move, China UnionPay announced on Saturday that its cards issued in mainland China could no longer be used to pay premiums on investment-related insurance products in Hong Kong.
Liu Jian, a Bank of Communications senior researcher in Shanghai, said China’s monetary policy is always the result of complex internal and external issues and has a different focus at different times.
“Avoiding risks stands out as the policy focus at this stage and we think the authorities will be more tolerant of the yuan’s fall,” Liu said. “However, we don’t think that means a free fall of the yuan – they are just showing a growing confidence in guiding the yuan’s expected depreciation, at a pace they think is still within their control.”
A wilder fluctuation of the yuan rate is also projected. The central bank on Monday set the central parity rate of the yuan at 6.7641 against the greenback, up 0.32 per cent from Friday, in the biggest increase in more than a month.
David Qu, an ANZ Bank economist in Shanghai, said China still faced mounting outflow pressure, which could weigh on the yuan exchange rate.
“The problem now is not whether the yuan will fall or not, but how much it will decrease,” Qu said. “Now the market is closely looking at the currency to see if it will break the 6.83 level, which was the exchange rate held after the 2008 financial crisis,” Qu said.
He said that yuan depreciation pressure could resume at year end and early next year on rising expectation of a US Federal Reserve interest rate hike in December and the opening of the annual forex quota of US$50,000 for individuals.
The Communist Party Politburo vowed on Friday to keep existing economic policies in place to ensure stable economic growth for the rest of the year.
The meeting, which came after the close of the Central Committee’s sixth plenum, called for “reasonable” fiscal expenditure as part of proactive fiscal policy, and sufficient liquidity in a prudent monetary policy.