Economist advises more balanced yuan policy

BEIJING - China should adopt a more balanced and flexible currency policy in response to two-way fluctuations of the renminbi, or yuan, in the future, a central bank economist said on Friday.

Yao Yudong, head of the Research Institute of Finance and Banking under the People's Bank of China (PBOC), wrote in the Shanghai Securities News that official policies should be well-prepared for both rises and falls of the yuan in the future, veering from the traditional theme of targeting the currency's appreciation.

"In the past few years, policy has been driven by a rising yuan. But now yuan two-way changes have become highly probable, the policy hence should be more balanced," Yao said.

After years of gains, the value of the yuan has reached equilibrium thanks to the government's consistent work to free up exchange rate management.

One of the strongest currencies in the world for years, the yuan's nominal effective exchange rate has appreciated 46 percent since China initiated foreign exchange (forex) reforms by depegging the yuan from the US dollar in 2005.

The PBOC adjusted the exchange rate formation system in August to better reflect market development by closing the gap between a lower central parity rate and higher market prices. The move triggered transient sharp falls before the yuan quickly stabilized in both onshore and offshore markets.

On Friday, the central parity rate of the yuan retreated by 98 basis points to 6.3595 against the US dollar, according to the China Foreign Exchange Trading System.

As to the future of the currency, Yao said there is no basis for persistent depreciation and the yuan will remain strong as an international currency in both the short and long term.

China's abundant forex reserves and stable financial system help the yuan hold steady, while a high savings rate and current account surplus lay the foundation for a strong currency, Yao said.

He believes the yuan's accelerating global journey will also boost the demand and serve as momentum for the currency's stabilization.

Steady economic growth creates sound conditions for a stable yuan. Official data showed the Chinese economy, despite a slowdown, remained robust in the first three quarters with an enviable growth rate of 6.9 percent.

China has been promoting the global use of its currency by allowing easier yuan flows across the border, opening up the financial market and encouraging currency swaps. The government is actively pushing forward the yuan's inclusion into the International Monetary Fund's (IMF) special drawing rights (SDR) basket.

To step up the yuan's internationalization, Yao said authorities should support cross-border yuan financing, widen individual yuan business and launch more financial products in onshore and offshore markets.

According to a latest report from the Society for Worldwide Interbank Financial Telecommunication, the yuan has overtaken the Japanese Yen to become the fourth most-used currency for global payments.