SHANGHAI: Avoiding excessive yuan appreciation should be one of China’s priorities in dealing with market expectations and regulations, said a former senior official with the country’s foreign exchange regulator.
One challenge to exchange rate fluctuations or flexibility is that the currency could overshoot, deviating from its economic fundamentals, said Guan Tao, chief global economist at BOC International and former head of the balance of payments division of the State Administration of Foreign Exchange (SAFE.). ), wrote in a social media post over the weekend.
“Market supply and demand have been the driving force behind the yuan rally this year, while an orderly expansion of domestic currency buying and foreign investment channels should be key to stabilizing the currency,” he said.
The Chinese yuan was one of the best performing Asian currencies this year, up about 3 percent against a strengthening dollar. The Chinese unit has been trade-weighted the strongest since the end of 2015.
“The rising multilateral yuan exchange rate has raised competitiveness concerns,” said Guan.
In specific policy proposals, the former SAFE official recommended a number of measures, including eliminating policy discrimination to allow clients the free choice of currency conversion onshore or offshore, and improving the management of foreign investment programs for qualified investors to manage their domestic currency purchases and theirs Foreign exchange risk to support hedging in the domestic markets.
To curb the recent yuan strength, the People’s Bank of China has ordered financial institutions to hold more foreign currency in reserve for the second time this year by increasing the Foreign Exchange Reserve Ratio (RRR) by 200 basis points (bps) to 9 percent from 7 percent from December 15th.
(Reporting by Winni Zhou and Andrew Galbraith; Editing by Kenneth Maxwell)