Analysts: Why China should bolster the yuan

China should allow its currency to appreciate in order to support the country's transition from an export and investment-driven economy to one led by consumer spending, analysts told CNBC on Tuesday.

China's currency (Exchange: CNY=) hit a 2016 high against the U.S.dollar on Tuesday as China's central bank set the midpoint rate of the yuan per dollar at its highest in over a month.

That move seemed to contradict China's recent controlled devaluation of the yuan, which has fueled fears that the economy is on the ropes and needs a weak currency so that Chinese products remain competitive on the international market.

Tuesday's move showed the People's Bank of China does not want to devalue the yuan in the near term or allow massive devaluation, said Leland Miller, president of analytics firm China Beige Book.

Allowing the currency to appreciate sends a message the PBOC will maintain stability and advances its goal of shifting to a consumer-led economy, he added.

"By strengthening the currency, keeping it strong, you're putting purchasing power in the pockets of households. You're allowing them to buy more," he told CNBC's "Squawk Box" on Tuesday. "If you want to switch from investment to consumption, this is one of the easiest ways to do it."

Patrick Chovanec, Silvercrest Asset Management's chief strategist, said China has sent mixed messages by shoring up the yuan and then letting it fall. However, he, too, said China should strengthen the yuan in order to support consumer spending.

Chovanec said he has been as bearish as anyone on China's stock and property markets and the direction of the economy, but he added that hedge funds were wrong to treat troubles on China's horizon like the Asian financial crisis, which was essentially a debtor crisis.

Some hedge fund managers such as Hayman Capital's Kyle Bass have made massive bets that the yuan will fall as loans held by Chinese banks go bad, forcing the PBOC to draw down foreign reserves to recapitalize financial institutions.

To be sure, looming losses in China's debt market are bound to drag down the Chinese economy in significant ways, Chovanec said, but the key point is that China is not exposed to foreign debt.

"Where countries run into currency crises is when they owe a lot of money abroad, or where there's dependence on foreign financing to support consumption levels. China is not in that circumstance," he told "Squawk Box."

Instead the yuan is facing pressure because capital is fleeing the country, which Chovanec chalked up to a failure to rebalance the economy and shift toward consumption.

A weaker yuan would erode the purchasing power of Chinese consumers, which would create an incentive for them to convert yet more yuan into dollars.

"It's a very different kind of crisis with a very different kind of solution," Chovanec said.

However, it is difficult to believe that with China's relatively low GDP per capita, the country can quickly transition to a consumer economy, said Boris Schlossberg, managing director of FX Strategy at BK Asset Management and a CNBC contributor.

"You can't turn a Chinese consumer into an American consumer overnight. That I think is the biggest problem they're facing right now," he told "Squawk Box."

The PBOC is "playing chicken with the market," said Schlossberg. While consensus says the yuan must ultimately fall 20 to 25 percent to rebalance the economy and reflate trade numbers, a decline would only lead to more capital flight.

January exports fell 11.2 percent from a year earlier — the seventh straight month of decline, while imports tumbled 18.8 percent — the 15th month of decline, both far worse than expected, data released Monday by the General Administration of Customs showed.

There is no question the yuan will fall this year, most likely 5 to 8 percent, Evan Medeiros, Eurasia Group managing director for Asia, said Tuesday.

"It's going to be gradual over time. You're going to see more volatility in the price of the renminbi to try and squeeze the speculators out of the renminbi trade," he told "Squawk Box," using another name for the yuan.

—Reuters contributed to this story.

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