Falling dollar and rising oil are a dangerous mix

Section:

China Says It Will Move on Yuan in 2005

From Reuters
Saturday, February 26, 2005

http://www.reuters.com/newsArticle.jhtml;jsessionid=HLRPGKO52AI3YCRBA
EKSFEY?type=businessNews&storyID=7746659

BEIJING -- China will gradually open its capital account in 2005,
another step in its plan to make the yuan currency fully
convertible, state television said on Saturday, quoting the
country's foreign exchange chief.

China, facing criticism from the West that a cheap yuan gives its
factories an unfair competitive edge, has held its ground against
demands it revalue -- but has promised to progressively free up
trading in the currency.

"We will gradually ease the amount of renminbi that can be exchanged
under the capital account, taking another step toward achieving full
convertibility of the renminbi," state television quoted Guo
Shuqing, head of the State Administration of Foreign Exchange, as
saying.

Guo also said China would support investment by insurance companies,
which took in 431.8 billion yuan ($52.2 billion) in premiums last
year, in stocks overseas, potentially increasing the outflow of
currency to balance huge inflows.

"China will support insurance companies to set up insurance funds or
carry out securities investments abroad," he said.

Beijing is studying the much-anticipated plan -- known as the
Qualified Domestic Institutional Investor (QDII) scheme -- but has
yet to give a firm timetable.

Last August, China allowed domestic insurers to buy $8 billion in
overseas debt, bringing them a step closer to winning permission to
invest in overseas stocks.

China has been under pressure from the United States and other
countries to free up its currency, known as either the yuan or
renminbi.

U.S. manufacturers argue the current fixed exchange rate of about
8.28 to the U.S. dollar is too low and amounts to an unfair trade
advantage.

Beijing has resisted persistent foreign pressure to free up the yuan
and has tried to encourage some capital outflows to help relieve
upward pressure on the currency to rise.

The yuan is convertible on the current account, which covers trade
flows, but subject to tight curbs on the capital account, which
covers investment.

China's central bank is being forced to issue huge amounts of yuan
to soak up foreign money flowing into the country, a process
economists say is helping fuel lending and inflation.

Much of the inflow is from investors seeking a short-term profit if
the yuan's value is increased. ($1=8.276 yuan.)

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