Central bank promises eventual yuan flexibility
Source: Shenzhen Daily Date: 2006-05-23
The central bank has pledged to work towards a more flexible exchange rate regime, but comments by government officials and researchers suggest greater liberalization could still take some time.
The People's Bank of China, in a reiteration of long-standing policy, said in its 2005 annual report that it will continue to push currency reforms while keeping the yuan on an even keel.
"We will strengthen the flexibility of the yuan's exchange rate, while keeping it basically stable at a reasonable and balanced level," the report said. The official China Securities Journal printed excerpts from the document over the weekend.
China revalued the yuan by 2.1 percent last July and cut it loose from a dollar peg to float within managed bands.
After rising at a glacial pace for the rest of 2005, the rate of climb quickened in February. Its ascent has since stalled, even though it briefly strengthened past 8 to the dollar May 15, despite intense U.S. pressure for a much stronger yuan.
It stood at 8.0225 per dollar yesterday.
In a sign policy makers are divided about how to proceed, two government researchers gave conflicting views on how Beijing should move forward in reforming its foreign exchange regime.
Zhang Bin, a researcher with the Chinese Academy of Social Sciences, said China should let the yuan rise further in several leaps, rather than through steady appreciation.
"For one, this would help fend off market expectations of yuan appreciation. These expectations pose a great threat to the stability of the economy," Zhang told the International Finance News.
"Slow, steady appreciation can only drag out that problem for a longer time," Zhang said.
But Liu Yuhui, head of the academy's China Economic Evaluation Center, wrote in the Shanghai Securities News that the costs of a rapid rise in the yuan will be "unbearable."
"If the yuan appreciates too quickly, it could lead to large outflows of foreign capital," Liu said in a commentary.
Liu said the development of China's property market relies heavily on foreign capital, and if the market turns down sharply it could lead to a new round of bad loans for banks.
The central bank, in its annual report, also sounded a warning about the risk of a new crop of bad loans.
Concerned about the risks of runaway credit growth, the central bank said it will fine-tune policy by adjusting commercial banks' reserve requirements, making changes to its rediscount rate, and using open market operations.
The People's Bank of China raised its benchmark one-year lending rate by 0.27 percentage points April 27 to 5.85 percent in a move that surprised markets.
Analysts had expected the central bank to rein in credit growth by increasing commercial banks' reserve requirements.
Most economists believe the most effective way of slowing credit and investment would be to reduce inflows of foreign currency, which are pumping up money supply, by letting the yuan rise faster.
But policy makers have consistently said that before the yuan can be allowed to move more freely, Chinese banks and businesses need a full range of instruments to hedge against currency risks.
To that end, China launched a market in currency swaps in late April, building on a forwards market introduced last August and a system of market makers put in place in January.
