MNI INTERVIEW: Yuan Strength Due to Temporary Factors-Ma Jun

The recent appreciation of the yuan has been driven by factors which may not be sustained, including China's rising current account surplus and relatively swift recovery from the Covid-19 pandemic, People's Bank of China Monetary Policy Committee member Ma Jun told MNI.

China's quarter-on-quarter GDP growth surged in Q2 and Q3 this year as it recovered from Covid, while most other economies were still in a contraction mode, said Ma, also the director of the Center for Finance and Development at Tsinghua University, in an interview on the sidelines of the 2020 Annual Financial Street Forum in Beijing on Thursday. Quarter-on-quarter growth, a decisive factor for the strength of a currency, is likely to slow as China returns to normal early next year, while that of the U.S. may accelerate once it begins to rebound from a very low base.

"Economic fundamentals decide the strength of a currency," said Ma, adding that arguments the yuan is entering a long-term appreciation trend are "not convincing."

China's economy is likely to return to trend rates by the first quarter of 2021, although y/y growth may jump to 18% due to the base comparison with the equivalent Covid-hit period of 2020 , Ma said. Growth in the fourth quarter this year is "clearly" set to reach 6% y/y, he said.

GAINING MARKET SHARE

While other countries' production capacity and supply chains were disrupted this year, China's remained largely intact, enabling it to gain export market share – a situation which might change as the pandemic eases across the globe, Ma noted.

"Other countries may not want to import so much of your goods when their production recovers in half a year or a year," he said.

China's services trade has also recorded a smaller deficit due to Covid-related restrictions preventing Chinese consumers from travelling and spending money abroad, another temporary factor, said Ma.

But the current strength of the yuan provides an opportunity for regulators to loosen capital controls, such as by allowing more outbound investments via relaxed restrictions on Qualified Domestic Institutional Investor rules and overseas direct investment, Ma said.

China's economy is likely to grow an annual average of 5% in 2021-2025, the period covered by the government's upcoming 14^th Five-Year Plan, said Ma.

GROWTH TARGET

"While the debate is mainly around 4% to 5% or 6% for the next five years, I think 5% makes sense as structural factors such as population aging will inevitably lead to somewhat slower growth," Ma said, adding policymakers should consider not setting an official GDP growth target for the next five years. Such a target may encourage excessive borrowing by local governments and distract their attention from more fundamental needs such as employment, health, and education, he said.

The PBOC is likely to maintain its broad policy settings, without much adjustment to interest rates in the near term, he said, noting that higher rates may not be feasible while the economy is still in a recovery phase, while reducing them could fuel financial risks in the property and stock markets.

The PBOC is unlikely to intervene directly in the FX market to slow the yuan's appreciation, Ma noted.

Ma, who also chairs the China Green Finance Committee, said President Xi Jinping's call for China to be carbon-neutral will spur industries and governments to accelerate transformation plans to lower emissions, especially in energy, construction and transportation.

Further measures are likely to be laid out in the 14^th Five-Year Plan, Ma said. The outline of the plan is due to be released next week, according to the official schedule.