China should let the yuan float as soon as possible to halt a further build-up of China's foreign exchange reserves and avoid destructive losses in its dollar investments, a former central bank adviser said in comments published on Friday.
Yu Yongding, a former academic member of the monetary policy committee at China's central bank, urged Beijing to stop buying dollar-denominated assets in order to reduce its vulnerability to swings in the world's major reserve currency.
If there is any lesson China can draw from the U.S. debt ceiling crisis, it is that it must stop policies that result in further accumulation of foreign exchange reserves, he wrote in an article in the Financial Times.
Until China can reduce the inflow of reserves, however, he did not say where Beijing should invest the bulk of those funds.
Yu asserted that Beijing must address the real cause of its huge pool of reserves by freeing a suppressed yuan and letting it rise by floating it.
He did not say whether China should use a managed float or freely floating currency regime.
Yu's comments were at odds with recent remarks from Xia Bin, a current academic member on the Chinese central bank's monetary policy committee, who said this week that China can't have a freely floating yuan in the next decade, and that the dollar would be a key global reserve currency for a long time.
Yu noted that Beijing has had little success in reining in its reserves by creating sovereign wealth funds, promoting the yuan aboard and stimulating domestic demand.
To float the renminbi is not costless, Yu said. However, its benefits for the Chinese economy will vastly offset those costs, while being favorable to the global economy as well.
Owner of the world's largest foreign exchange reserves at $3.2 trillion, China is the also biggest foreign buyer of the U.S. Treasuries. Analysts estimate about 70 percent of its reserves are invested in dollar assets, including Treasuries, although the exact investment mix has not been disclosed.
Yu is not the first Chinese analyst to urge Beijing to free the yuan and let it rise to rebalance the world economy. But Beijing worries that a stronger yuan would hurt its export sector, a major employer in China.
In response, China's major trading partners have complained that Beijing's insistence on keeping the yuan artificially weak gives Chinese exporters an unfair price advantage in global markets.
(Reporting by Aileen Wang and Koh Gui Qing; Editing by Ken Wills)