China has been urged to release the reins on the yuan exchange rate if it’s serious about giving their currency global clout.
Beijing has taken some steps towards more financial liberalisation in recent years but fears of volatility that would unsettle capital flows and China’s economy have meant their grip on the yuan has remained tight.
But a senior central bank researcher has said this week if China really wants to challenge the dollar’s pre-eminence it needs to free up its currency.
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“We have to admit that under the condition of yuan internationalisation, 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 will also help the central bank gain more policy independence, Zhou said in the speech published on Wednesday.
China has been trying to boost the yuan’s global clout since 2009 to reduce its reliance on the US dollar in trade and investment settlements and challenge the dollar’s role as the world’s major reserve currency.
The PBoC has repeatedly said it has all but stepped back from regular intervention on foreign exchange, but it continues to strongly influence daily trading moves through its morning guidance rate setting.
US SANCTIONS
However, Zhou said China should now actively promote the yuan’s internationalisation, as more countries hope to reduce their dependence on the dollar, prompted by Washington’s frequent use of sanctions.
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 US Federal Reserve’s aggressive policy easing, Zhou added.
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 Reuters
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