Ex-PBoC adviser advocates Yuan float

Yu Yongding, former advisor to People's Bank of China (PBoC) advocating the idea that Yuan should better get floated.

According to him, after almost a decade of fighting against expectations of appreciation, PBoC has finally succeeded in its attempt to curb carry trades in first quarter of 2014, with its forceful market intervention. Since then PBoC is faced with new and tougher challenge to curb the depreciation expectations.

"Because the 2014 intervention coincided with the weakening of China's economic fundamentals, it ultimately amounted to pushing on an opening door. Instead of providing credible resistance to upward pressure on the exchange rate, as intended, it triggered an outright reversal, with depreciation expectations beginning to creep into foreign-exchange markets."

"in the second quarter of 2014, China recorded a capital-account deficit for the first time in decades. And by the first quarter of 2015, that deficit more than offset the current-account surplus, meaning that China registered its first international balance-of-payments deficit in recent memory."

Mr. Yongding, believes, PBoC has now basically three options -

• Stop all intervention and let Yuan float
• Link it to a basket of currencies
• Peg it tightly to US Dollar

He thinks, floating would be the best thing to do because -

"the PBoC should reinforce the Chinese government's market-oriented reform plans and allow the Renminbi to float. China is still running a large current-account surplus and a long-term capital-account surplus, and it has not fully liberalized its capital account; so the chances are good that the Renminbi would not fall too far or for too long.

Moreover, even if the Renminbi did experience a double-digit depreciation, China would not be thrust into financial crisis. After all, the country's stock of corporate external debt is not too large; the currency mismatch within Chinese banks is small; and inflation is just above 1%. To bolster such financial buffers, China must enforce existing capital controls much more strictly."