A former central bank adviser has urged China to free the renminbi from its peg to the US dollar and clearly inform the market of its exchange rate policy to prevent further depreciation of the currency.
“It’s meaningless to peg the yuan against the dollar,” Li Daokui, currently a professor of Tsinghua University, told Bloomberg News in an interview at the World Economic Forum in Davos, Switzerland on Wednesday.
“The world is not in need of another currency that’s pegged against the dollar, it needs a relatively stable currency that’s pegged against a basket of currencies.”
Chinese authorities have been supporting the currency with more than US$500 billion in foreign reserves over the past 12 months, cutting them to US$3.3 trillion.
The drawdown was almost equivalent to the entire stockpile of Switzerland, the world’s fourth-largest holder of foreign exchange, Bloomberg said.
Regulators also tightened capital controls, cracking down on illegal money transfers and restricting lenders from conducting some cross-border transactions.
“None of these onshore or offshore intervening measures are ideal,” Li said. “The best way is to clearly tell the market what is China’s policy on the exchange rate and at what specific level the yuan should be pegged against a basket of currencies on a daily basis.”
The China Foreign Exchange Trade System, which is run by the People’s Bank of China (PBoC) to facilitate interbank trading, last month unveiled a multi-currency index, spurring speculation that policy makers want to reduce the currency’s link to the dollar and let it weaken further.
The yuan’s peg to the dollar has become gradually looser over the past decade, since policy makers said in 2005 that the currency would be allowed to fluctuate against a basket of exchange rates.
The yuan remains under pressure, especially with the approach of the Lunar New Year holidays, because official figures aren’t showing clear signs of improvement in the economy, Li said.
Still, the larger size of the economy and its financial markets will make it easier for the government to manage its currency woes than during the 1997-1998 Asian financial crisis, he said.
“Let’s see whether the PBOC can win the war of stabilizing the yuan, which should be its top priority now,” said Li.
“It’s much more important than the interest rate at this stage.”
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