(May 16): China should relax its control over the yuan as the current focus on keeping the currency stable has limited the scope for possible monetary policy, two former officials said this week.

The authorities need to introduce a broader range of foreign-exchange (forex) policy tools, said Guan Tao, global chief economist at BOCI Securities, suggesting the current controls are too rigid. Former People’s Bank of China (PBOC) official Guo Kai also advocated allowing the yuan to trade in a wider range.

Guan, who previously worked for the China’s currency regulator, the State Administration of Foreign Exchange, said attracting more foreign inflows and reviving investor confidence in yuan-denominated assets were needed to support the currency, according to an article published by Xinhua.

“Foreign investors aren’t worried about fluctuations of the exchange rate,” but the increasingly rigid control of the yuan creates the potential for it to become “untradable”, he wrote in the article, adding that a major driver of short bets against the currency has been foreign investment outflows.

Guan said a key hypothesis used for setting China’s economic policies this year was that the dollar would start to weaken, but that’s likely to be proved wrong and put more pressure on the yuan.

Wider range

The yuan should be allowed to fluctuate between seven and 7.3 per dollar, Guo Kai, a researcher at the China Finance 40 Forum, a Beijing-based think tank, wrote in the summary of a report published on Sunday. The currency has been trapped in a relatively tight range between 7.15 and 7.25 for the past four months.

Restoring the flexibility of the yuan’s exchange rate could open the room for more monetary policies, he said. “Then interest rates can be better adjusted, the macro-economy and capital market can become more stable and positive.”

The comments from Guan and Guo highlight the increasing concern surrounding China’s tight grip on its currency, especially as higher-for-longer US interest rates bolster the dollar. The greenback’s strength is adding to China’s dilemma over whether to prevent the yuan from weakening, or instead to introduce more easing measures to stimulate growth and allow the currency to fall.

Greater flexibility

Former PBOC governor Yi Gang said last month China should strengthen the flexibility of the yuan exchange rate and allow it to move in both directions. The level of the currency should be decided by the market under the influence of rate policy, he said at an event.

The relatively tight control by the authorities has limited the onshore yuan’s decline to only around 1.6% this year, less than most of its emerging Asian peers. The support has taken the form of a daily reference rate, around which the currency is only allowed to move by 2% in either direction.

The yuan slipped to within a whisker of the weak end of its trading band several times in April. Trading halts in some parts of the yuan’s trading market were also triggered.