Despite facing a substantial external demand gap caused by US tariffs, keeping the renminbi exchange rate generally stable as much as possible should remain the best option for Chinese policymakers, said leading economists and policy advisers.
Instead of tolerating a sharp depreciation by the local currency against the US dollar to buffer the shock on exports, China should launch a pro-consumption policy package of over 1 trillion yuan ($137.2 billion) while ramping up subsidies for heavily affected exporters and workers, they said.
"While local currency depreciation can possibly enhance export competitiveness, its impact may be limited in the face of significant trade barriers," said Huang Yiping, dean of Peking University's National School of Development and a member of the China Finance 40 Forum, a top think tank.
Meanwhile, currency depreciation may unintentionally dampen investor sentiment in local financial markets, especially as domestic economic growth momentum still needs to be consolidated, Huang said on Monday.
At the People's Bank of China's monetary policy committee meeting last month, it was stressed that the central bank would strengthen the resilience of the foreign exchange market while resolutely guarding against the risk of exchange rate overshooting to keep the renminbi exchange rate generally stable at an appropriate, balanced level.
Huang is a member of the committee.
Citing the need to consider the impact of renminbi exchange rate adjustments on both trade and financial markets, Huang said he agrees that keeping the renminbi generally stable as much as possible remains a reasonable policy option.
Guo Kai, executive president of the CF40 Institute, which is affiliated with the forum, said with the US dollar weakening against the euro, any considerable depreciation of the renminbi against the greenback — which might support Chinese exports to the United States though — would lead to an even sharper weakening of the renminbi against the euro.
In that case, the pressure brought by US tariff hikes on exports would shift partly to Europe and perhaps Japan, as well as China's neighboring countries, raising the risk of trade frictions between China and its trading partners, said Guo, who has worked at the central bank in the past.
To avoid such an unfavorable outcome, he said China should instead offset the US tariff shock by launching an additional policy package of more than 1 trillion yuan to boost domestic consumption.
"Measures to expand domestic demand at this point are not only about domestic economic management," Guo said. "It would also carry diplomatic signals, showing that China has no intention of shifting the costs of trade frictions (with the US) to any other economies."
Zhang Bin, a CF40 senior researcher and a national political adviser, agreed that it is best to keep the renminbi generally stable against the dollar, warning that a gradual yet continuous renminbi weakening could form one-sided expectations and bring pressures of capital outflows.
The onshore renminbi rallied against the greenback after an initial weakening upon the US "reciprocal tariffs" announcement in early April, trading at 7.2873 as of Monday evening, strengthening by 0.16 percent since the beginning of the year, according to Wind Info.
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