China needs to create deep and liquid markets to avoid currency risks as it makes the yuan a convertible currency, former Federal Reserve Chairman Ben S. Bernanke said in Shanghai.
“China needs to avoid currency mismatch as it opens its capital account,” Bernanke said at a speech at the Shanghai Forum on Monday. “For a currency to be internationally traded, what you need most is liquid markets. A deep market means people can get their money out.”
China is in the final stages of opening up its capital account, giving global investors greater access to its stock and bond markets while making it easier for citizens to put their money in offshore assets. A freer flow of funds is needed for policy makers to achieve their goal of getting the yuan recognized as a reserve currency when the International Monetary Fund conducts a review in October.
The latest initiative was announced on Friday, when Chinese regulators and their Hong Kong counterparts said that cross-border sales of funds can begin July 1 with an initial quota of 300 billion yuan ($48 billion) in each direction. That comes six months after a link between the Shanghai and Hong Kong stock exchanges was opened.
“When opening the capital account you need to make sure the economy is strong enough to handle the fund flows out,” Bernanke said. “An open account is a two-edged sword” and a drop in the currency could cause panic and an exodus of money, he said.
It isn’t necessary to devalue the yuan, news website Sina reported People’s Bank of China Deputy Governor Yi Gang as saying on Friday in response to a question on whether the currency should be cheapened to revive the economy. The yuan is the sole Asian currency to advance against the dollar in the past year, enhancing its appeal before the IMF reviews the Special Drawing Rights basket of reserve currencies. The basket currently comprises the dollar, euro, pound and yen.
China’s desire to make the yuan a SDR currency is for “pride and image”, Bernanke said. “If the yuan becomes an SDR currency it won’t have any effect on the average Chinese. It’s mainly symbolic.”