The key consideration of the People's Bank of China to adjust its Chinese currency Renminbi ( RMB) central parity system is not to let RMB depreciate, but rather that it allows the market to play a more decisive role in determining the currency's value, James Laurenceson, a professor of Chinese economy, told Xinhua in an interview.
Laurenceson, who is also Deputy Director of Australia-China Relations at University of Technology Sydney's Australia-China Relations Institute, said on Thursday in the interview that the exchange rate, along with the interest rate, are the most important prices in the economy and "we now have clear signs that the Chinese authorities are allowing the market to play a bigger role in determining both."
"What economic theory and practice says is that a flexible RMB will contribute to a more stable Chinese and global economy," Laurenceson said.
"China is now the world's largest economy in purchasing power terms, and growth is driven by domestic consumption and investment. Economic conditions in China no longer just follow those in the United States. This means it makes little sense for the RMB to be rigidly tied to the U.S. dollar," he said.
Commenting on China's strategy of gradually liberalizing the currency, Laurenceson said that ten years ago adopting a flexible exchange rate would have been premature for China because its economy was export-driven, particularly by exports to the U.S.
"But that has now changed, the economy is larger and the time is right to adopt a more flexible currency. This gradual approach has served China well and other countries would do well to take note the speed and order in which China has liberalized its currency."
Laurenceson warned that much of the discussion has been on the lower value of the RMB, but this misses the key point, which is that the RMB is being made more flexible.
"A flexible RMB that is free to move up or down is of enormous benefit to China and the world economy," he said, saying that the greenback, the Euro and the Yen are all flexible currencies.
"The world economy is not well served by the RMB being the only major currency pegged in value."
As for the prospect of RMB be included in the International Monetary Fund (IMF) Special Drawing Right (SDR) basket, Laurenceson said the key point is the flexibility of the RMB.
"A more flexible exchange rate makes it easier for China to open its economy to international investment flows. And the more open is China's economy, the greater the justification for the RMB to be included in the SDR basket."
