Scholar says free-floating yuan is nothing to fear

SHANGHAI: China should overcome the "irrational fear" of allowing the yuan currency to float freely, an influential government researcher said on Tuesday, as markets seek clear policies in an increasingly complex financial environment.

Yu Yongding, a scholar at the China Academy of Social Sciences and former central bank adviser, made the comments amid a growing debate among Chinese economists about whether the yuan should be allowed to trade more freely.

With no clear direction from the central bank, traders have been closely scrutinising the comments of influential academics such as Yu for a sign of any future policy movements.

"How the future exchange rate will go depends on central bank policy and I have no way of reading their minds, but I want to say that we should overcome the irrational fear of a free-floating yuan," Yu was quoted as saying by the official Shanghai Securities News.

Yu's comments notwithstanding, traders said it was unlikely that Chinese authorities would loosen their grip on the exchange rate in the near future, noting that there was no clear consensus on what the equilibrium rate would be, for example.

Yu told a forum on Monday that China has a huge trade surplus, US$3 trillion of foreign exchange reserves, the world's fastest economic growth, and a strong government.

"(China) should be the country least afraid of a fluctuating exchange rate," he was quoted as saying.

Yu has also advocated that China stop intervening in currency markets and instead preserve its dwindling foreign exchange reserves.

He suggested the central bank set a "bottom line" of 25% for the yuan to depreciate.

China's foreign exchange reserves fell to near six-year lows in December, but held just above the critical US$3 trillion level, as authorities stepped in to support the weakening yuan ahead of US President-elect Donald Trump's inauguration.

Though economists insist Beijing has been trying to prop up rather than weaken its currency, Trump has threatened to declare China to be a currency manipulator and slap punitive tariffs on Chinese goods. - Reuters