China’s central bank is under increasing pressure from policy advisers to let the yuan currency fall quickly and sharply, by as much as 10-15%, as its recent gradual softening is thought to be doing more harm than good.
The People’s Bank of China (PBOC) has spent billions of dollars buying yuan over recent months to defend the exchange rate, but has failed to stabilize market sentiment. The currency has steadily lost another 2.6% against the US dollar even after the bank sprung a surprise devaluation of nearly 2% in August.
That gradual, managed depreciation makes the yuan a one-way bet for investors who see the currency weaken even as the central bank intervenes to prop it up.
Policy insiders are now calling for a quick and sharp yuan depreciation, backed by tighter capital controls to curb speculation and the flight of money out of the country.
“We should let the yuan have a considerable depreciation, but we should have a bottom line; it cannot create a big impact on the economy and the financial system, and big panic in the capital market,” an influential government economist told Reuters, suggesting the yuan be allowed to depreciate by 10-15% over an unspecified timeframe.
Letting the yuan fall sharply and quickly could help cushion many of China’s debt-laden companies as the government pursues far-reaching structural reforms. Beijing is keen to restructure industry through “supply side” reform, especially reducing industrial over-capacity, but fears the corporate sector is too weak to handle that.
