Gold investment advisers get to work a big new market

Section:

By Rob Delaney
Bloomberg News Service
Saturday, April 23, 2005

http://quote.bloomberg.com/apps/news?
pid=10000006&sid=aBtwWU1O6KdE&refer=home

BEIJING -- China may accelerate preparations to loosen the tie
between its currency and the U.S. dollar in response to intensifying
international pressure for the change, central bank Governor Zhou
Xiaochuan said.

"If there is more pressure from outside, it will force us to speed
up our reform," Zhou said at the Boao Forum in southern Hainan
island today, the first time China's government has said it may
alter its schedule for the exchange rate because of overseas
interests. He didn't give a timetable.

Finance ministers from the Group of Seven industrial nations last
weekend stepped up calls for China to ease the yuan's decade- old
peg to the dollar, which the U.S., Japan, and Europe say gives the
nation an unfair trade advantage. A more flexible yuan may help
China contain inflation and money supply growth amid record foreign-
exchange inflows.

"There's no urgency to take the measure," said Bert Hofman, lead
economist at the World Bank in Beijing. "For now, they are managing
quite well the capital inflows. Despite the buildup in foreign
reserves, monetary growth is fairly modest."

China's central bank buys and sells dollars to keep its currency at
about 8.3 to the dollar, regardless of market developments. Critics
say the yuan became undervalued as the dollar declined in recent
years, giving Chinese manufacturers a price advantage that's helped
drive the U.S. trade deficit to a record and hampered economic
growth in Europe.

China's foreign reserves, the world's second-biggest after Japan's,
jumped 50 percent to an all-time high of $659.1 billion at the end
of March from a year earlier, as exports surged and investors bet
the government will let the yuan appreciate.

Zhou said China welcomes international pressure because it will
force the nation to speed up needed financial reforms. Still, "we
don't see that the pressure is that strong right now," he said.

U.S. Treasury Secretary John Snow, who led the G-7's April 15-16
gathering in Washington, last week called for China to embrace a
more flexible exchange rate immediately. Canadian counterpart Ralph
Goodale said China should understand there is a "freight train
coming" as the U.S. Senate and European Union weigh tariffs or
import restrictions on Chinese goods.

The G-7's sharper rhetoric marked a shift in the group's efforts to
coax the world's fastest-growing economy into ending the peg. Some
investors said the strategy might backfire, making China less likely
to revalue because its leaders won't want to be seen as bowing to
outside influence.

"We have a very clear target in this regard, but we have our own
sequence," Zhou said at the forum, a two-day gathering of regional
leaders. "We are doing some preparation -- for example, the reform
of the financial sector -- to enlarge the role of the foreign-
exchange market."

Zhou also said overseas manufacturers that complain about the yuan's
value should first consider their competitiveness in the
international market. "For those companies with real competitive
advantage, they will not have to be concerned about the exchange
rate," he said.

China's central bank has to buy dollars that flow into the economy
to maintain the peg, pushing up money supply and making it harder
for the government to slow the economy and stem inflation by reining
in bank lending.

China's economy, the world's seventh-largest, grew by a more than
expected 9.5 percent in the first quarter, the government said last
week. Still, M2 money supply expanded 14 percent and inflation was
2.7 percent in March, both within the government's targets.

"The economic growth rate is not necessarily linked with inflation,"
Zhou said. "China has a very high savings rate and a lot of
investment. The economy may have a higher growth rate."

Zhou said China's inflation rate is "still tolerable." The
government will closely watch the producer price and consumer price
indexes when considering whether further interest rate increases are
needed, he said. The central bank raised its benchmark lending rate
for the first time in nine years on Oct. 29, by 0.27 percentage
point to 5.58 percent.

"Up to now, we can't say that the 9.5 growth rate in the first
quarter would really lead to high inflation," Zhou said.

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