China signals change of course on its currency policy

Beijing: China has hinted at changing its long-standing yuan policy to liberalise its currency against the dollar, signalling willingness to alter course on exchange rates amid US President Donald Trump's threats of a trade war.

For the first time in an annual government report, China included the requirement to ensure the stable global status of yuan as one of its major tasks, dropping the line "keeping a stable yuan at a reasonable and balanced level" which was included in the previous three reports, Hong Kong-based South China Morning Post reported today.

In his lengthy work report submitted to China's parliament, the National People's Congress (NPC) yesterday, Chinese Premier Li Keqiang said "the renminbi exchange rate will be further liberalised, and the currency's stable position in the global monetary system will be maintained".

The new wording may indicate that Beijing will be more tolerant of yuan exchange rate moves against the dollar and gradually reduce its intervention in the foreign exchange market this year, the Post report said.

Trump, who made some tough statements against China before and after his election, branded China as a currency manipulator to gain unfair advantage from exports and even threatened to impose tariffs on Chinese goods.

The Chinese currency yuan has depreciated about 6.6 percent last year.

The yuan is also losing its appeal for investors, even though it had obtained a nominal reserve currency status from the International Monetary Fund (IMF), thanks to the Chinese government's tightened capital account controls and the prospects of weakening against the USD, analysts said.

"The capital controls will hurt the yuan's status and reputation," Shen Jianguang, chief economist with Mizuho Securities Asia told the Post.

"In the past two years, the status of the yuan as an international settlement and valuation currency, as well as the scale of the yuan's fund pool offshore, have fallen," he said.

Beijing's efforts to make the yuan an international currency were largely shelved in the past year.

In Hong Kong, the primary offshore yuan market, yuan deposits at the end of 2016 dropped 46 percent from a peak in December 2014, the report said.

The value of international payments in yuan, released by payments processor Swift on Thursday, fell 29.5 percent in 2016, while the yuan's share in international payments dropped by 0.63 percentage points to 1.68 percent at the year's end.

The costs for Beijing to defend a "stable" yuan exchange rate are getting dearer after China burnt USD one trillion of its foreign exchange reserves in the last two years to bolster the yuan's value.

China's forex reserves, the highest in the world, fell below USD three trillion for the first time in six years sparking concerns over their rapid decline.

Forex reserves stood at about USD 2.99 last December, down from about USD?3.01 trillion. The persistent decline of China's forex reserves has caused widespread concern about the country's overall financial stability, as the diminishing stockpile, still the world's largest, is perceived as shielding the economy from currency and foreign trade volatility.

A state-run think tank in a rare criticism accused the central bank, the People's Bank of China (PBOC) of playing "dangerous game" of selling the reserves to defend weakening yuan.

"Forex reserves are valuable assets that [China] can use at critical times. It's a pity that they are being sold heavily in the market. It should be the last resort,"Zhang Ming, senior fellow at the Institute of World Economics and Politics under the state-run Chinese Academy of Social Sciences, said.

A number of researchers have been publicly calling the government to change course over the yuan policy to permit yuan depreciation when the market wants it to weaken.

"Trump is threatening China as a currency manipulator, and we can't give him evidence (for such allegations)," he told the Post.

The USD is very likely to rise following Fed's rises and that "will put a lot of pressure on the yuan throughout 2017," Christopher Balding, a professor at Peking University HSBC Business School in Shenzhen said.

Balding said the yuan's exchange rate had become "more dependent on the USD than a couple of years ago" and the Chinese central bank needed to manage the interest rate differentials between China and the US carefully to avoid capital flight.

Pan Gongsheng, head of the State Administration of Foreign Exchange told the Post ahead of the opening ceremony of the NPC that short-term factors would disturb the foreign exchange markets, but the yuan's value will be eventually determined by fundamental factors such as sound economic growth domestically.