If China wants to fix its economy and end deflation it should stop trying to prop up its currency and let it slide.
That’s the clear message Yu Hongding, a director of the Chinese Academy of Social Sciences and member of China’s national planning committee, gave Ambrose Evans-Pritchard at the Ambrosetti forum of global policymakers on Lake Como.
In news that will be music to the ears of hedge fund managers betting on a weaker Yuan, Yu likened the current Chinese position to that of Britain in the lead up to the Pound leaving Europe’s Exchange Rate Mechanism after an attack by George Soros in 1992.
“They must stop intervening on the exchange market. China needs to devalue by 15%. They are creating conditions for speculators,” Yu said.
And even though data released last week showed the run on China’s foreign exchange reserve might have ended Yu, who amongst other things was previously “a rate-setter for the central bank”, said the slowdown in capital flight won’t last.
“Reserves will continue to fall until we devalue. Once we get towards $2 trillion the markets will start to panic. They won’t believe that the government can control it any longer,” he told Evans-Pritchard.
Yu believes the core of China’s problem is the nation is suffering concurrent and self-reinforcing “deflationary spirals,” which only the 15% devaluation and well targetted fiscal stimulus can address.
But while markets may find such a move uncomfortable Yu said that a short sharp devaluation would break the cycle and the Yuan would find it’s level quickly while the economy rebounded.
“Have you ever in history heard of a country with $3.2 trillion of reserves and a current account surplus of 3% of GDP suffering a currency collapse? It is unthinkable,” Yu said.
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