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'China should end exchange-rate distortion‘

China should press ahead with efforts to make the yuan's exchange rate more flexible as it seeks to boost the currency's global usage, according to a former central bank adviser.

The yuan's likely inclusion in the International Monetary Fund's Special Drawing Rights basket is recognition of the progress China has made since it unified the official and market exchange rates in 1994, but more needs to be done, said Yu Yongding, a former academic member of the People's Bank of China's monetary policy committee.

“Over the past two decades, the single most important market distortion has been exchange-rate distortion,” he said in an interview. “Without a flexible exchange rate, the renminbi internationalization will not go very far,” he said, without giving specific details on the types of reforms he is suggesting. The renminbi is an alternative name for the yuan.

The People's Bank of China's Aug. 11 devaluation of the yuan and introduction of a more market-driven fixing spurred the currency's biggest monthly tumble in two decades. It has subsequently stabilized as the central bank intervened to support the exchange rate and stem capital outflows. China is opening up its markets to foreign investors as it tries to shift to a more consumer-driven economy from a reliance on exports and state spending.

”I don't know why the PBOC is so obsessed with the stability of the renminbi exchange rate,“ said Yu, who was an adviser to the monetary authority from 2004 to 2006 and is now a member of the Chinese Academy of Social Sciences. “A flexible exchange rate will give greater impetus to China's economic readjustment and growth paradigm shift.”

Capital outflows have abated following the suspected intervention in the past few months. A gauge of n Chinese financial institutions foreign-currency assets rose for the first time in five months in October after a record drop the previous month. The nation's $3.5 trillion stockpile of foreign-exchange reserves halted a five-month slide, while its current-account surplus swelled to an all-time high.

The yuan rebounded 0.9 percent over September and October after weakening 2.6 percent in August. It's down 2.8 percent this year, following a decline of 2.4 percent in 2014 that was the first annual drop since 2009. The currency will lose 0.3 percent by the end of the year and a further 3 percent in 2016, according to the median estimates of analysts surveyed by Bloomberg.

The yuan becoming a reserve currency, alongside the dollar, euro, yen and pound, will stave off depreciation concerns in the short term and boost the bond market, according to Australia & New Zealand Banking Group and Invesco. The move could lure more than $1 trillion to Chinese assets over five years, Standard Chartered Plc said.

The yuan's entry into SDR is “inevitable” and the real issue is whether the currency is allowed to float freely or if there is intervention for political reasons, Alan Greenspan, the former chairman of the Federal Reserve, told a forum in Beijing on Wednesday via a video link from Washington.

The significance of the SDR inclusion may have been exaggerated, Yu said.

“The inclusion is symbolic, though it should be regarded as a good thing,” he said. “It will not have any significant impact on anything and it will change nothing unless the inclusion is a step toward more reforms of the international monetary system.”

Investors shouldn't be too preoccupied by the prospect of another yuan devaluation and, even if it happens again, the impact will be short-lived, Yu said. What's more important for China is to have a flexible exchange rate for the sake of monetary autonomy, he said.

“In the long run, the renminbi should be a strong currency due to its current account surplus and long-term capital-account surplus.” (Bloomberg)