China Must Escape ‘Dollar Trap:’ Former Official

Floating renminbi crucial to avoid losses, ex-official of central bank writes

China should stop buying U.S. dollars and allow the renminbi to float as quickly as possible, according to a former member of the monetary policy committee of China's central bank. That will allow the country to escape the "dollar trap."

Yu Yongding said in a piece published in the Friday Financial Times that the Chinese government has allowed risk to escalate by holding such large dollar reserves while maintaining renminbi-denominated liabilities. "Chinese officials are understandably angry about the irresponsible brinkmanship demonstrated by their American counterparts in recent weeks," Yu began. He then said that it was time for China to "end its dependency on the U.S. dollar."

The danger, according to Yu, is that America will allow its debt to grow until it has "no option but to inflate the burden away." The longer the arrangement continues, "the more violent and destructive the final adjustment will be." The solution? Float the renminbi, despite the fact that to do so is "not costless."

Reuters reported that Yu's comments were not in agreement with those of Xia Bin, a current academic member on the Chinese central bank's monetary policy committee. Bin said this week that China could not expect to float the renminbi in the next 10 years, and that the dollar would continue to be a key reserve currency for some time to come.

China holds the largest foreign exchange reserves in the world, at $3.2 trillion. Approximately 70% of that is in U.S. dollars. Yu did not suggest where such a huge reserve might turn if an exit from the dollar was pursued, or whether a floating renminbi should be controlled or allowed to float freely.

It is unlikely that Beijing will allow a floating currency any time soon, because it fears a fluctuating renminbi would put it at a disadvantage  in the export sector. However, China's trade partners have complained for some time that the artificially low value of the currency gives the country an unfair advantage in trade.

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