China Will Need to Give Up FX Controls Eventually, PBOC Official Says

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China has to give up its control over the currency’s exchange rate eventually if it wants to achieve greater global use of the yuan, according to a central bank official.

The yuan exchange rate will have to be determined by global market participants, and this will allow China to have free cross-border capital flows and pursue an independent monetary policy, Zhou Chengjun, director of the People’s Bank of China’s finance research institute, said in a speech published Wednesday.

“We need to admit that under the condition of yuan internationalization, we won’t be able to control the exchange rate, and China’s central bank has to let go of exchange-rate goals in the end,” said Zhou. He made the comments at a forum on April 16, according to a transcript released by the forum organizer.

The PBOC has made it clear it has stopped regular intervention and will let the market play a bigger role in deciding the exchange rate, Zhou said. He cited the fact the yuan has weakened past 7 per U.S. dollar -- previously seen as an important psychological threshold -- in the past two years, and said it’s one of the more volatile major currencies in the world.

China Will Need to Give Up FX Controls Eventually, PBOC Official Says

The yuan will appreciate against the U.S. dollar in the long term as a result of China’s continued economic growth and the rising purchasing power of the currency, as well as the Federal Reserve’s repeated monetary easing, according to the speech. The onshore yuan advanced to its strongest level since 2018 last week, even though the PBOC tried to moderate the gains by setting the daily fix at a weaker-than-expected level.

The U.S. has abused its power to carry out sanctions through the dollar’s dominance in global payments and settlements, and more countries and market entities are hoping to reduce their reliance on the dollar, Zhou said. This provides a great opportunity for China to promote wider use of the yuan, he said.

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