AVOIDING excess yuan appreciation should be one of China’s priorities in managing market expectations and regulations, a former senior official at the country’s foreign exchange regulator has urged.

A challenge for exchange rate fluctuations or flexibility is that the currency could overshoot, deviating from its economic fundamentals, said Guan Tao, global chief economist at BOC International and the former head of the Balance of Payments department of the State Administration of Foreign Exchange (SAFE), writing in a social media post over the weekend.

“Market supply and demand were the dominant force driving the yuan rally this year, while orderly expanding domestic foreign exchange purchases and outbound investment channels should be the key to stabilizing the currency,” he said.

The yuan has been one of the best-performing Asian currencies this year, rising about 3 percent against a strengthening U.S. dollar. In trade-weighted terms, the Chinese unit is at its strongest since late 2015.

“The soaring multilateral yuan exchange rate has prompted concerns over competitiveness,” Guan said.

In specific policy suggestions, the former SAFE official recommended a slew of measures, including eliminating policy discrimination to allow clients to freely choose foreign exchange conversion onshore or offshore, and improving management of outbound investment programs for qualified investors to support their domestic foreign exchange purchases and foreign exchange risk hedging in domestic markets.

In what’s seen as a move to rein in recent yuan strength, the People’s Bank of China has directed financial institutions to hold more foreign exchange in reserve for a second time this year, by raising the foreign exchange reserve requirement ratio by 200 basis points to 9 percent from 7 percent from Dec. 15. (SD-Agencies)