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China should Free Up Yuan Eventually to Spur Greater Use

BEIJING, May 19 (Reuters) - China should free up the yuan exchange rate over time to support wider global adoption of the currency, a senior central bank researcher said.

China has been trying to boost the yuan’s global clout since 2009 to reduce the reliance on the U.S. dollar in trade and investment settlements and challenge the dollar’s role as the world’s major reserve currency.

But, despite some steps toward liberalization, it maintains a tight grip on the currency due to concerns that excessive volatility could affect cross border capital flows and harm the economy.

“We have to admit that under the condition of yuan internationalization, we can’t manage the yuan exchange rate. The central bank will eventually give up the exchange rate target,” Zhou Chengjun, head of the financial research institute of the People’s Bank of China (PBOC), said in a speech at a recent forum.

Freeing up the yuan also will help the central bank gain more policy independence, Zhou said in the speech published on Wednesday.

The PBOC bank has repeatedly said it had basically exited from regular intervention on foreign exchange, though it continues to strongly influence daily trading moves through its morning guidance rate setting.

China should actively promote the yuan internationalization, as more countries hope to reduce their dependence on the dollar, prompted by Washington’s frequent use of sanctions against some countries, Zhou said.

The yuan is likely to appreciate against the dollar over the medium and long term due to China’s sustained economic growth and the consequences of the U.S. Federal Reserve’s aggressive policy easing, Zhou said.

Persistent weakness in the dollar had helped push the yuan to near three-year highs last week. The PBOC introduced multiple measures in late 2020 and earlier this year to stem the rise of the currency by reducing capital inflows.

(Reporting by Kevin Yao; Editing by Kim Coghill)

Source: Reuters


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