Stabilizing Expectations for Yuan Exchange Rates Is Top Priority, Says Former Top PBOC Official

Zhou Ailin / Yicai

2016-12-12

(Yicai Global) Dec. 12 -- Stabilizing expectations for yuan exchange rates and disrupting the trend of one-way depreciation is a top priority, a former top official from China’s central bank told Yicai Global.

“One-way expectations tend to lead to overshooting. Assuming that a currency is supposed to fall five percent, it could drop more substantially if families and businesses exchange the currency for other currencies in a concerted manner,” Sheng Songcheng, adviser to the People’s Bank of China and former head of the central bank’s statistics and analysis department, told Yicai Global in an exclusive interview.

“For example, individuals will be allowed to use the quota on forex purchases (USD50,000 per person) for the new year starting from next January. Given the expectation of yuan devaluation, the public may purchase foreign currencies in a concentrated manner at the start of next year out of asset allocation and hedging considerations, adding to pressures for yuan depreciation,” Sheng said.

A freely-floating yuan is indeed what academics have urged and is also China's long-term goal, Sheng said. Real considerations are more complex, however. When China’s economic fundamentals remain unchanged, but the expectation of one-way devaluation is strong, the government must take decisive action to break the one-way depreciation of the yuan mindset to boost market confidence, he said.

With China's special debt structure, if the government allows the yuan to fall, it will lead to stronger overshooting of exchange rates, which will have a slight effect in promoting exports and boosting the economy, but will be negative for imports, Sheng noted. Once public confidence in a stable yuan flags, both the economy and society will suffer and conserving China’s foreign reserves will prove difficult. On the other hand, dispelling and even reversing the expectation of one-way depreciation of the yuan could prompt a backflow of capital to China.