Authorities shouldn’t be too eager to take heat out of yuan’s appreciation trend

Source:Global Times Published: 2017/9/14 19:13:39

China is considering whether to stand its currency policy on its head. After years spent crushing yuan short positions, officials worry they've overheated the currency. But capping this rally will be tricky, diplomatically and economically. Better, perhaps, to let the bulls run a while longer.

As the yuan fell against the dollar starting in 2014, the People's Bank of China moved to stop capital flight, using a mixture of intervention and administrative edicts. It was largely successful. The yuan is up 7.5 percent this year, reserves are stable, and private investment is back.

A bit too successful, perhaps. With a strong economy and a weak dollar, yuan bulls suddenly look scarier than the bears.

Apparently in reaction, the central bank eased restrictions on offshore forwards - making it easier to short yuan - and signaled discomfort with the pace through conservative settings to its guidance rate.

Sources told Reuters some officials worry the strong yuan is hurting China's export sector, a big employer, after August exports disappointed.

So-called "hot money" inflows have historically been a bigger headache than capital flight, scrambling trade data and helping inflate asset bubbles. Today, thanks to recent programs opening China's stock and bond markets to foreign investors, it's never been easier for quick cash to flow in.

But overreaction is always a risk. Suppressing the exchange rate to support exports wouldn't play well in Washington, given friction over imbalanced trade. It would also waste an opportunity to resume reform.

Nor is hot money so threatening. Chinese exporters are practiced at hedging foreign exchange (forex) risk. The last three years proved the People's Bank of China, the central bank, has gotten much better at managing liquidity in different exchange rate environments. It could even be helpful: The government could sterilize inflows via the forex reserves, then reinvest them in Belt and Road infrastructure overseas.

Either way, one day the Federal Reserve will hike rates and the dollar will rise again. Sometimes it's best to do nothing.

The author is Pete Sweeney, a Reuters Breakingviews columnist. The article was first published on Reuters Breakingviews. bizopinion@globaltimes.com.cn



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