China should allow the yuan to trade with greater flexibility,giving marketforces a larger role, as Beijing continues its push to boostinternational use ofits currency,said Huang Yiping,a member ofthe People's Bank ofChina's Monetary Policy Committee.
Foreign-exchange policy needs to become more flexible, and if market pressure for yuan appreciation intensifies, regulators should allow market forces to play a greater role, Huang argued. As foreign-exchange reforms have progressed over recent years, particularly along side the internationalisation ofthe yuan, the importance of anchoring the currency to the U.S. dollar has diminished, he added.
In 2025, China's real effective exchange rate fell sharply while the trade surplus reached a record high.
However, Huang, who is also dean of Peking University's National School of Development, pushed back on claims based solely on a widening trade surplus to show that the yuan is undervalued, noting that China will notrely on currency devaluation to boostexport competitiveness.
Given persistent capital-outflow pressures in capital account,assessing the yuan as under valued from a supply-and-demand perspective is difficult,he said.
But Huang warned that the country's size able production capacity risks increasing reliance on exports if domestic demand remains weak. Without stronger domestic demand, the exportof excess capacity could intensify trade frictions and create new external pressures, he said.
As China shifts toward innovation-driven growth, industrial policy should avoid creating new overcapacity,Huang said. Local governments' venture-capital funds have supported key industries when private and foreign investment appetite has been weak, but greater transparency and market-based discipline are needed to prevent resource misallocation and "involutionary" competition.
LOCAL GOVERNMENT FOCUS
China has setup an inter-ministerial leading group to tackle irregular and illegal industrial subsidies by local governments, Huang said, warning that many subsidies fail to raise technological levels or efficiency and instead expand capacity using existing technologies, exacerbating overcapacity and competition.
Reforms to the division of responsibilities and spending obligations between central and local governments have also become urgent,Huang said, noting thatlocal fiscal stress has partly offsetthe effects of accommodative central government policies.
The direction of reform should be to reduce the administrative responsibilities of local governments while expanding their fiscal authority,he said. Economic development and industrial promotion could be left more to the market,while local tax bases could be strengthened by increasing local revenue shares from sources such as digital taxes, consumption taxes and value-added taxes, he suggested.
From: MNI
