US should not expect China to keep yuan stable alone, says former senior official with China’s foreign exchange watchdog

South China Morning Post 發布於 2019年08月18日04:08 • Xie Yu yu.xie@scmp.com
  • Guan Tao says US president Donald Trump is disrupting market sentiment, then blaming China
  • Keeping the yuan stable is ‘a bilateral thing, ’ says Guan Tao
A clerk counts banknotes at a bank outlet in Hai'an, Jiangsu province, in China. Photo: EPA-EFE

US President Donald Trump should not expect China to keep its yuan stable with the US dollar when he keeps rocking market sentiment and provoking disputes, says a former senior official with China's foreign exchange watchdog.

"It (maintaining the yuan's stability) is a bilateral thing. It is unreasonable that you (US president Trump) insist on provoking disputes, striking market sentiment, while requiring China on its own handle the mission of stabilising the exchange rate," Guan Tao, a prominent economist, said in an interview with the South China Morning Post in Beijing.

Guan was head of the Balance of Payment Department under the State Administration of Foreign Exchange (SAFE) from 2009 to 2015.

China has reiterated it does not want a war, whether the frontline is trade or finance, Guan said.

He said China and the US have entered a "mutual assured destruction" period, in which each should be careful handling a weapon that could hurt the other " because any damage would be reciprocal.

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US president Trump has accused China of weakening the yuan to boost exports by making them cheaper in overseas markets.

Guan Tao says maintaining the stability of the yuan

Guan said the yuan could in fact appreciate against the US dollar if the US Federal Reserve stops lowering interest rates, the US dollar weakens and tensions are eased between the world's two largest economies.

"In fact, the yuan did strengthen for a period of time since last December, when the three conditions were met," he said.

The offshore yuan weakened from 6.3 yuan per US dollar in early 2018, to 6.95 yuan per US dollar by the end of November. But it strengthened after December after a trade truce between Chinese president Xi Jinping and Trump in Argentina.

The yuan had strengthened to around 6.7 yuan per US dollar by late April before tensions escalated again in early May, when a highly anticipated agreement between two sides spun out of control, as Trump raised tariffs on US$200 billion worth of Chinese imports and indicated he was prepared for a prolonged economic fight.

The yuan further weakened last week, to an 11-year low, breaking the level of 7 yuan per dollar, after Trump announced he would to slap import tariffs on another US$300 billion worth of Chinese goods.

Last week's depreciation of the yuan provoked strong criticism from Trump. He said Beijing was weaponising its currency to help exports, and the US treasury department designated China as a "currency manipulator".

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Guan dismissed the charge, saying the movement of a currency is fundamentally decided by "the relationship between supply and demand", but is also highly affected by sentiment.

Under the trade tension, the influence of market sentiment is amplified, he said.

"Some traders have included Tweets by Trump into their metrics for making investment decisions. This explains something " Trump's Tweets cannot change import and export orders immediately, but will affect sentiments at once," he said.

Looking forward, he dismissed the chance that Beijing would depreciate the yuan sharply to offset the tariff pressure.

The central bank has been working hard to prevent one-way bets on the yuan. Because if one-way expectations are formed about the yuan, the pressure will be huge to maintain stability, he explained.

After an unexpected depreciation of the yuan in August 2015, China experience a great deal of capital flight, which accelerated foreign exchange reserves plummeting. The country lost nearly US$1 trillion by the end of 2016 from the peak level of US$3.99 trillion in June 2014.

China still has the world's biggest foreign reserve, at US$3.1 trillion as of July.

The latest figure by the US Treasury shows China lost its status as the biggest creditor of the US to Japan in June, but still holds bonds, bills and notes worth US$1.11 trillion.

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The US is concerned that China could hurt the US financial market and economy by selling the treasuries, Guan said. However, China would not have many choices for asset allocation if it gives up US dollar denominated assets, he pointed out.

The foreign reserve of China is so big that any allocation, whether in gold or in other governments' treasuries, would rattle the global market, he said.

"However, it is a different story if the confrontation between the two countries goes to an extreme. Then it will be necessary to close the exposure to a hostile state's sovereign debts," he said.

It is never easy for two big countries to reach an agreement in a dispute, Guan said. So far, the trade war is taking its toll on smaller economies in the global supply chain, while the negative impact on the economies of China and the US will appear as the tension continues, he said.

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