MineWeb profiles Top Gold fund, managed by Ferdinand Lips and J.P. Schumacher

Section:

China's Bank Chief Seeks
to Allay Renminbi Fears

By Andrew Balls
Financial Times, London
Monday, August 29, 2005

http://news.ft.com/cms/s/cb859dfe-1828-11da-a14b-00000e2511c8.html

JACKSON HOLE, Wyoming -- recent reforms to China's currency regime
do not represent a one-off adjustment, according to Zhou Xiaochuan,
governor of the People's Bank of China, and a managed floating
exchange rate is in place that will allow a move to a market-driven
system.

In an interview with the Financial Times, Mr Zhou said: "I think
it's very clear that China is introducing a new exchange rate
mechanism. It is not a one-time adjustment."

Some Washington politicians and policy analysts have expressed
concern that China's new currency regime, which it announced in July
along with a 2 per cent revaluation against the dollar, was a one-
off adjustment.

The US Treasury has stressed that with a band that allows the
renminbi to float by 0.3 per cent per day against the dollar, and
having broken the peg to the greenback and introduced a link to a
basket of currencies, China has introduced an exchange rate
mechanism that will allow a greater revaluation against the dollar
over time, paving the way for a free float.

Mr Zhou declined to give details on the timetable for widening the
band in which the renminbi is allowed to float and for moving to a
more market driven system, but said that observers should not assume
progress would be very slow.

In the initial period movement might seem small, "but the important
thing is that it has started to float and over time market forces
will play a more and more important role," Mr Zhou said.

"It is a gradual way to expand the role of market forces, because we
need time for Chinese companies and the public to adapt to the new
system. They need to learn how to live with the new exchange rate
mechanism and familiarise themselves with financial instruments like
foreign exchange forwards, and others, to hedge their exchange rate
risk."

Mr Zhou was speaking on the sidelines of the Federal Reserve
symposium, the first time a Chinese central bank governor has
attended the Fed's summer retreat.

He said there was a consensus in China on the need for reform. The
administration was working to gauge the impact of the 2 per cent
revaluation on different industries, and also in terms of the
public's understanding of the new regime.

But Mr Zhou said that a priority for China was to increase domestic
demand-led growth, to help reduce the current account surplus.

"Our investment demand has been very strong for several years, so we
are now trying, to some extent, to slow down investment and enhance
the household consumption demand to improve the economic structure."

Fast growth of investment, compared with the slower growth of
household spending, has led to productive capacity that serves the
export market, rather than domestic consumption. This has resulted
in the widening trade balance.

The Chinese savings rate has approached 45 per cent of gross
domestic product, a level seen as too high.

"This is the adjustment China must do. I think exchange rate policy
does work to some extent to achieve a more balanced economic
structure, but domestic demand policy is more important than the
exchange rate."

Mr Zhou said that China and some other Asian countries needed to co-
ordinate their efforts to promote domestic demand-led growth.

"On the other side we would like to see what kind of policy actions
and adjustments happen in the US, the eurozone and Japan."

Chinese leaders have said the US needs to reduce its fiscal deficit
and the pace of consumer spending in order to cut its current
account deficit.

This stands at close to 6 per cent of GDP, an unprecedented level
for a large economy.

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