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 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?"
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He said he believed the yuan 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.
(Editing by Mark Bendeich and Will Waterman)
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