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A challenge for exchange rate fluctuations or flexibility is that the currency could overshoot, deviating from its economic fundamentals, said Guan Tao, global chief economist at BOC International and the former head of the Balance of Payments department of the State Administration of Foreign Exchange (SAFE), writing in a social media post over the weekend.
“Market supply and demand were the dominant force driving the yuan rally this year, while orderly expanding domestic FX purchases and outbound investment channels should be the key to stabilising the currency,” he said.
The Chinese yuan has been one of the best-performing Asian currencies this year, rising about 3% against a strengthening dollar. In trade-weighted terms, the Chinese unit is at its strongest since late 2015.
“The soaring multilateral yuan exchange rate has prompted concerns over competitiveness,” Guan said.
In specific policy suggestions, the former SAFE official recommended a slew of measures, including eliminating policy discrimination to allow clients to freely choose FX conversion onshore or offshore, and improving management of outbound investment schemes for qualified investors to support their domestic FX purchases and FX risk hedging in domestic markets.
In what’s seen as a move to rein in recent yuan strength, the People’s Bank of China has directed financial institutions to hold more foreign exchange in reserve for a second time this year, by raising the foreign exchange reserve requirement ratio (RRR) by 200 basis points (bps) to 9% from 7% from Dec. 15.
