Bundles of Chinese one-hundred yuan banknotes are arranged for a photograph at the Counterfeit Notes Response Center of KEB Hana Bank in Seoul, South Korea. (Photographer: SeongJoon Cho/Bloomberg)

PBOC Adviser Says Yuan Should Weaken as Dollar Set to Strengthen

(Bloomberg) -- People’s Bank of China’s adviser Fan Gang said a gradual devaluation of the yuan should be allowed as the U.S. dollar is set to strengthen, and that moves to loosen the nation’s capital borders should continue despite outflows.

China’s economy may not pick up, but has bottomed out with housing and manufacturing improving, Fan said in a Bloomberg Television interview in Shanghai. The government should use "moderate control to allow gradual yuan devaluation," said Fan, who is also director of the National Economic Research Institute.

Fan’s remarks follow speculation that China’s policy makers are more comfortable with prospects for further currency weakening after the Group of 20 meetings concluded in Hangzhou on Monday. Rising capital outflows and speculation that the Federal Reserve could raise borrowing costs this year have added pressure on the yuan. China’s foreign-exchange reserves, the world’s largest currency hoard, slipped to the lowest level since 2011 in August as the central bank continued its defense of the currency.

As the economy still faces downward pressure, it’s "natural for investors to look outside for opportunities," Fan said. China should encourage private sector capital flows, allowing qualified domestic individuals to invest overseas, and moderately widen the FX-conversion quota for the public, he said.

With assistance from Karen Zhang, Yinan Zhao, Stephen Engle