| BEIJING, July 4 (Reuters) - China should experiment with complete exchange rate flexibility to gain the upper hand in its fight against inflation and hot money, a prominent Chinese academic said in comments published on Friday.
The overriding objective of maintaining a stable yuan has stripped China of monetary policy independence as the central bank has been forced to mop up surging liquidity from speculators betting against the currency controls, He Fan of the Chinese Academy of Social Sciences said.
His comments are the latest in a lively debate in Beijing about whether the best way to defeat currency speculators is to freeze the yuan and wait them out or let it rise sharply to undermine future speculation.
The debate, far from academic, has taken on urgency as China's foreign exchange reserves have swelled to $1.8 trillion with inflation running near decade highs.
"The central bank has no choice but to use reserve requirements and sterilisation policies to ease inflationary pressure, but the space for its operations is getting smaller and the side-effects more serious by the day," he said in an opinion piece in the official China Securities Journal.
He estimated that bills issued by the central bank in its sterilisation operations occupied 10-20 percent of commercial lenders' assets. With the required reserve ratio at a record 17.5 percent, nearly 40 percent of commercial banks' assets have been tied up, which has soured their profitability, he said.
By letting the yuan float freely, China would at a stroke end the one-way bet on the currency's continued appreciation, creating uncertainty for speculators and deterring hot-money inflows, he said.
That was all the more important because "the future trend of inflation in China is not optimistic", he said.
Although headline consumer inflation is coming down thanks to cresting food prices, manufacturing costs are rising as commodity prices surge and will rise much higher as the government abandons price controls that are proving too expensive, he said.
"Although we've already missed the best chance to adjust the yuan's exchange rate, increasing the speed of exchange rate reforms is still the best policy option," he said.
Based on trading of the yuan in the non-deliverable forwards market, he said the currency should rise about 10 percent in the next 12 months.
The People's Bank of China, which tightly controls the yuan let it rise 6.6 percent against the dollar in the first half of this year, its fastest rise since it was depegged from the U.S. currency in 2005. (Reporting by Simon Rabinovitch; editing by Jonathan Hopfner) |
