Yu Yongding: RMB Will Depreciate 10% China Will Not Be In Crisis.

The people's Bank of China is facing a dilemma. In the past 10 years, the people's Bank of China's efforts to curb the continued appreciation of the renminbi were finally successful in the first quarter of 2014, when the central bank's strong market intervention lowered the RMB exchange rate to curb arbitrage.

But now, the central bank is facing a more difficult challenge. The seemingly irreversible devaluation is expected to undermine economic stability, while China's ability to withstand extra instability is the worst.

The intervention in 2014, along with the weakening of China's economic fundamentals, eventually promoted the continued depreciation of the RMB.

Not only did the renminbi not provide reliable force to resist the pressure of appreciation of the exchange rate, in order to achieve its own intentions, it led to a radical reversal drama, and the expectation of depreciation began to spread to the foreign exchange market.

Therefore, in the second quarter of 2014, China's capital account deficit for the first time in decades.

By the first quarter of 2015, the deficit exceeded the current account balance, which means that China has been in the state of deficit of international payments for the first time in recent years.

Nevertheless, taking into account China

The market is still confident that the people's Bank of China will be able to lock the RMB exchange rate at its own level, no matter what the external balance of payments is in China.

Therefore, the expectation of market depreciation is not strong.

In August last year, the PBC lowered its central parity rate by 1.9%. This may be a response to the IMF's report encouraging China to move the central parity of exchange rates to market interest rates.

This practice has disturbed the market and strengthened the expectation of depreciation.

The PBC has stepped in quickly to avoid panic, but it is too late: the expectation of further devaluation of RMB is firmly established in the market.

Devaluation is expected to trigger more and more capital outflows in China, and the pressure of devaluation is further strengthened. PBC continues to intervene in the foreign exchange market, usually in an unpredictable way (the purpose is to curb speculation).

Therefore, the PBC actually adopted a crawling pegged exchange rate system.

In my view, the PBC should strengthen the Chinese government's market-oriented reform plan and allow the RMB to float freely.

China still maintains a large amount of current account balances and long-term capital account balances, and has not fully opened its capital account; therefore, the renminbi will probably not fall too much, or the duration of the decline will not be too long.

Moreover, even if the yuan does experience the depreciation of two digits (or more than 10%), China will not plunge into the financial crisis.

After all, Chinese companies have little external debt; the amount of currency mismatch in China's banking sector is small; inflation is only slightly higher than 1%.

To strengthen financial buffering,

The existing capital controls must be implemented more strictly.

Nevertheless, there may be panic in the market, along with all the uncertainties that may arise from small events.

Therefore, the people's Bank of China can plan a pitional period. During the pition period, the renminbi will be pegged to a basket of currencies, and a reasonable exchange rate intermediate price will be set and the fluctuation range of 7.5% or even 15% should be set.

The people's Bank of China can also choose not to declare the floating range of the renminbi, so that investors who judge that the renminbi has fallen enough may start buying the Renminbi before the RMB really touches the bottom, thus stabilizing the exchange rate before the PBC is forced to use large quantities of foreign reserves.

Although the crawling pegged exchange rate system can eliminate the expected depreciation in the short run, thereby reducing the related capital outflow, it can not eliminate more long-term devaluation expectations, let alone reduce the unrelated expectations of depreciation.

Now.

In fact, the crawling pegged exchange rate regime encourages the outflow of certain types of capital, such as the closing of arbitrage pactions, the dollarization of household accounts, and the withdrawal of portfolio investment.

At the same time, the fundamentals of China's economy are still not optimistic.

All these forced the people's Bank to spend a lot of foreign exchange reserves, which exceeded 500 billion dollars in 2015 alone, and the purpose of the yuan was to keep the depreciation rate of RMB against the US dollar at 5%.

In this ratio, these hard earned foreign reserves will soon be exhausted.

This is not a permanent solution.

The people's Bank of China is aware of the current challenges and has allowed the renminbi to fall at a slow but definite pace since November.

However, although this "invisible depreciation" played a role in a period of time, market participants decided again at the beginning of this year to start selling the renminbi in hand.

The people's Bank of China has three options: stop all intervention, allow the yuan to float freely; the RMB exchange rate refers to a basket of currencies; or the RMB exchange rate is strictly linked to the US dollar, just as it did in the 1997 Asian financial crisis.

But until now, the people's Bank of China has not disclosed any plans, in addition to continuing its current support for the renminbi policy.