BY KEVIN YAO
China's move to devalue its currency reflects a growing clamor within
government circles for a weaker yuan to help struggling exporters, ensuring the
central bank remains under pressure to drag it down further in the months
ahead, sources said.
The yuan has fallen almost 4 percent in two days since the central bank
announced the devaluation on Tuesday, but sources involved in the policy-making
process said powerful voices inside the government were pushing for it to go
still lower.
Their comments, which offer a rare insight into the argument going on
behind the scenes in Beijing, suggest there is pressure for an overall
devaluation of almost 10 percent.
"There have been internal calls for the exchange rate to be more
flexible, or depreciated appropriately, to help stabilize external demand and
growth," said a senior economist at a government think-tank that advises
policy-makers in Beijing.
"I think yuan deprecation within 10 percent will be manageable.
There should be enough depreciation, otherwise it won't be able to stimulate
exports."
The Commerce Ministry, which on Wednesday publicly welcomed the
devaluation as an export stimulus, had led the push for Beijing to abandon its previous
strong-yuan policy.
Reuters could not verify how much influence Commerce Ministry officials
had wielded in the decision to drive the yuan lower, but the sources said its
officials were claiming victory after a long lobbying campaign against what some
of them regarded as over-zealous reform led by the central bank.
The People's bank of China (PBOC) had been keeping the yuan strong to
support the ruling Communist Party's goal of shifting the economy's main engine
from exports to domestic demand.
A stronger yuan boosts domestic buying power, helps Chinese firms to
borrow and invest abroad, and encourages foreign firms and governments to
increase their use of the currency.
Until the devaluation, the currency had appreciated overall by 14
percent over the past 12 months on a trade-weighted basis, according to data
from the Bank for International Settlements.
CHANGE OF COURSE
Premier Li Keqiang had repeatedly ruled out devaluation, but increased
risks to economic growth, exacerbated by recent stock market turmoil, increased
pressure to reverse course, the sources said.
At the weekend, China posted a shock 8.3 percent slump in July exports.
"Exporters face very big pressure, and China's economy also faces
very big downward pressure," said a researcher at the commerce ministry's
own think-tank, which recommended earlier this year that the government should
unshackle the yuan.
"The yuan depreciated only slightly versus the dollar, but it has
gained sharply against other currencies. China's economy and trade are no
longer strong; why should the yuan be strong?"
He said he believed the yuan CNY=CFXS could fall to 6.7 by year-end, which would represent a near 9 percent
decline since the eve of the devaluation. It traded around 6.43 against the
dollar on Wednesday, its lowest since August 2011.
The PBOC described its devaluation as a one-off move designed to make
the currency more responsive to market forces.
The central bank guides the market daily by setting a reference rate for
the yuan, from which trade may vary only 2 percent. On Tuesday, it said it was
setting the midpoint based on market forces, which have been willing the yuan
lower.
BEIJING DETERMINED TO MEET TARGET
Beijing is determined to achieve its economic growth target of 7 percent
for this year. Top leaders will chart the course for the next five years at a
meeting in October, and they are likely to continue targeting annual growth of
around 7 percent.
"They (top leaders) are determined to hit 7 percent target. The
downward pressure is big (but) so is the determination," said an economist
inside the cabinet's think-tank.
Beijing prefers a gradual devaluation because a single, big move could
spark capital flight and undermine its goal of fostering global use of the yuan
in trade and finance, sources said.
China has been lobbying the IMF to include the yuan in its basket of
reserve currencies, known as Special Drawing Rights, which it uses to lend to
sovereign borrowers. This would mark a major step in terms of international use
of the yuan.
The IMF said on Wednesday that the central bank's new way of managing
the exchange rate appeared to be a welcome step.
"There is definitely downward pressure on the economy, but we
cannot rely (alone) on currency depreciation," said Zhu Baoliang, chief
economist at the State Information Centre, a top government think-tank.
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