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November 7, 2011 2:49 pm
China should allow the renminbi to fall when other emerging market currencies are weakening, a leading government researcher has said.
China’s central bank has talked about introducing more two-way volatility in the renminbi’s trading, but the idea of allowing outright depreciation has rarely been voiced publicly in official circles. Premier Wen Jiabao pledged last month to stabilise the exchange rate to support exporters.
Fan Jianping, chief economist of the State Information Center, a think-tank within the powerful state planning bureau, said that signs money was leaving China suggest now may be the time for the country to allow its currency to weaken. He added that a continuing fall in China’s foreign exchange reserves, which dropped $61bn to $3,202bn in September, would be evidence of the kind of capital outflows that should trigger depreciation.
Mr Fan’s comments, made at a forum in Beijing, are at odds with the pledge by governments at the G20 summit last week to refrain from competitive devaluation of currencies.
They also fly in the face of the government’s past practice of keeping its currency steady at times of financial turmoil. Because the renminbi’s exchange rate is so politicised internationally, analysts have said that China will again refrain from depreciation as the global economy deteriorates for fear of antagonising critics and sparking a currency war of competitive devaluations.
US lawmakers have already proposed legislation targeting China that would punish countries for manipulating their currencies, a move that Chinese officials have strenuously opposed.
“In other emerging markets there has been an outflow of capital, leading to quite big depreciations in places like Brazil and Russia. If we also face similar outflows, then we have the conditions for depreciation. At times when the renminbi should fall, we should let it fall,” Mr Fan said. In the past three months, the renminbi has appreciated by 1.4 per cent against the US dollar while most emerging market currencies have fallen. That includes the Brazilian real and Russian rouble, which have dropped 10 per cent and 7.3 per cent respectively.
China implemented a de facto currency peg during the global financial crisis in 2008, locking the renminbi in place against the dollar even as other emerging market currencies plunged. That had hurt China both economically and diplomatically, Mr Fan said.
“If our exchange rate had been more flexible at the time, our trade sector would not have been hit so severely. And later, we attracted global criticism because the renminbi was not seen as sufficiently flexible. People even thought that we were manipulating it. If you want to talk about manipulation, when we didn’t let it depreciate, no one praised us,” he said.
Mr Fan said that China had learnt its lesson and would not reinstate a peg. “We are getting smarter. We can let the renminbi adjust more according to domestic and international conditions, allowing the market to play more of a determining role.”
Mr Fan’s views place him outside consensus in Beijing, though some investors are also beginning to take a more bearish view on the Chinese currency.
The central bank has kept the renminbi on a path of gradual appreciation for the past year and has prevented the official exchange rate in the mainland market from declining over the past month despite the downward pressure on it. But in the smaller offshore market in Hong Kong, where international investors can trade the currency, the renminbi has fallen, and now trades nearly 1 per cent below the onshore rate.
“If market demands for depreciation are so strong, then we should let the renminbi adjust according to the market,” Mr Fan said.
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