RMB float to ease risks, ex­perts say

Ren­minbi has slid to its weak­est level since the global fi­nan­cial cri­sis in 2008

China Daily European Weekly - - Front Page - By CHEN JIA chen­jia@chi­nadaily.com.cn

Al­low­ing the ren­minbi ex­change rate to float more freely could be a wise choice for China in the face of trade con­flicts and eco­nomic down­side risks, ac­cord­ing to ex­perts. By an­a­lyz­ing re­cent sig­nals from the au­thor­i­ties, as well as mar­ket per­for­mance, they be­lieve the gov­ern­ment much prefers a freer RMB, or wants the mar­ket to de­cide its value.

The mon­e­tary author­ity seems to face a dilemma: De­fend the cur­rency by tight­en­ing liq­uid­ity, which may lead to credit de­faults and the fast burst­ing of as­set bub­bles, or tol­er­ate a rel­a­tively weaker cur­rency against the US dol­lar, though en­sur­ing that a low in­ter­est rate could sus­tain strong eco­nomic growth.

At the same time, ex­perts are con­cerned that fur­ther tight­en­ing the mon­e­tary en­vi­ron­ment could hurt as­set prices, es­pe­cially hous­ing prices.

“You don’t need to make the RMB stronger than it should be, as the dol­lar is surg­ing in its value, when money is sucked into the US amid in­ter­est rate hikes and mon­e­tary pol­icy nor­mal­iza­tion,” says Huang Yukon, se­nior as­so­ciate of the Asia pro­gram at the Carnegie En­dow­ment for In­ter­na­tional Peace and for­mer China di­rec­tor for the World Bank.

On Oct 30, the RMB slid to its weak­est level since the global fi­nan­cial cri­sis. Its daily ref­er­ence rate, which bands the on­shore RMB’s moves within 2 per­cent on ei­ther side, dropped to 6.9574 per dol­lar, the low­est in more than a decade.

Re­fer­ring to a psy­cho­log­i­cal thresh­old for for­eign ex­change rate traders of 7 yuan per dol­lar, Gao Hai­hong, an econ­o­mist at the Chi­nese Academy of So­cial Sciences, says: “To set a cer­tain thresh­old is un­nec­es­sary, and 7 yuan per dol­lar is not the tar­get of the cen­tral bank. The main fo­cus of the mon­e­tary pol­icy is do­mes­tic tar­gets, es­pe­cially to sta­bi­lize growth and de­mand.”

Some ex­pe­ri­ence has shown that, when the mon­e­tary author­ity chooses to tar­get an ex­change rate within a cer­tain range, in­ter­est rates and con­di­tions in the do­mes­tic econ­omy must adapt to ac­com­mo­date this tar­get, and do­mes­tic in­ter­est rates and money sup­ply can be­come more volatile.

As the US Fed­eral Re­serve is ex­pected to im­ple­ment the fourth rate hike this year in De­cem­ber, some an­a­lysts spec­u­late that the nar­rowed China-US in­ter­est rate gap may trig­ger more cap­i­tal out­flows from China and in­crease down­ward pres­sure on do­mes­tic as­set prices.

“Com­pared with a cur­rency un­der pres­sure, the burst­ing of an as­set bub­ble is a more se­ri­ous prob­lem, and pol­i­cy­mak­ers need to be very care­ful about the mon­e­tary pol­icy to pre­vent tight­en­ing too much,” says Yoshiki Takeuchi, di­rec­tor-gen­eral of the In­ter­na­tional Bureau of Ja­pan’s Min­istry of Fi­nance.

“If the pol­icy is too tight, peo­ple will ex­pect a bub­ble to burst in the prop­erty mar­ket. Ja­pan used to raise the in­ter­est rates and con­strain money coming into the bank­ing sec­tor, but it was too hasty in do­ing so, which has led to the prop­erty mar­ket slump.”

Since do­mes­tic con­sump­tion is now lead­ing the Chi­nese econ­omy, sta­bi­liz­ing prop­erty prices is im­por­tant,” says Takeuchi.

Be­sides, a good method for avoid­ing bub­ble bursts is not to make bub­bles. It re­quires pol­i­cy­mak­ers to con­tin­u­ally push forward the delever­ag­ing process and to con­trol debt growth at a lower pace, ac­cord­ing to an­a­lysts.

Amid the trade ten­sions, China’s do­mes­tic de­mand is grow­ing sig­nif­i­cantly faster than that of its trad­ing part­ners, thus its im­ports tend to out­pace ex­ports. The coun­try’s cur­rent ac­count bal­ance is sub­ject to down­ward pres­sure.

“The shrink­age of the ac­count sur­plus will be a con­straint on the pol­icy stance with re­gard to cap­i­tal open­ing in gen­eral and fi­nan­cial out­flows in par­tic­u­lar,” says Louis Kuijs, head of Asia eco­nomics at Ox­ford Eco­nomics.

“It will have an im­pact on views re­gard­ing fi­nan­cial sta­bil­ity, on­shore RMB sen­ti­ment and the pol­icy ap­proach to cap­i­tal ac­count open­ing,” he says.

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