Exchange rate reform may take time
- By Louis Kuijs
0 Comment(s)
Print
E-mail China Daily, May 23, 2013
With such foreign exchange pressures, the kind of appreciation that would bring the yuan to a point from where there is true two-way risk would be substantially larger than what we saw in recent weeks. Even though China seems to have become more tolerant toward exchange rate appreciation, there must be limits to the appreciation the government can accept given that China's trade-weighted real exchange rate is already 15 percent higher than what it was two years ago while global demand is weak.
Another challenge is sequencing. Although countries should not open their capital account before making good progress toward exchange rate flexibility, some of the steps already taken toward the internationalization of the yuan and the role of Hong Kong have already created quite a bit of de facto capital account opening for many enterprises, especially Chinese mainland enterprises.
The sizeable financial flows, outward in much of 2012 and inward so far in 2013, complicate progress toward more exchange rate flexibility - which is one reason why the government acted in early May to make it harder for China's banks to facilitate inflows and to clamp down on inflows apparently disguised as export revenues.
Given these challenges, even though there is in principle no reason to delay more exchange rate flexibility, in practice it may take a while before the exchange rate can be brought to a level from which there is true two-way risk without damaging the real economy too much. And, since major capital account liberalization should await introduction of meaningful flexibility, hopefully the government can resist the calls for a quick move to full "yuan convertibility under the capital account".
The author is chief China economist at RBS.
Go to Forum >>0 Comment(s)