China''s reserve bureau bans its departments from futures trading

Section:

By Andrew Peaple and Emily Barrett
Dow Jones Newswires
Monday, January 23, 2006

http://www.nasdaq.com/aspxcontent/NewsStory.aspx?cpath=20060123
\ACQDJON200601231026DOWJONESDJONLINE000413.htm

LONDON -- A run on the U.S. dollar that would see investors rushing
to dump the currency is a possibility, although it's difficult to
judge how likely an outcome that is, the International Monetary
Fund's chief economist said Monday.

Speaking at a conference on global imbalances, Raghuram Rajan also
said a rapid and large appreciation of the Chinese yuan against the
dollar and other currencies would be more likely to damage the world
economy than be of benefit to it.

With the U.S. current account deficit running at close to 7% of
gross domestic product, economists have long expected the dollar to
depreciate against other major currencies, and feared the dollar
could go into free fall if that prompted international central banks
and investors to flee the greenback.

"We are in a risky situation," said Rajan. "You cannot discount a
run on the dollar. But you cannot fully quantify that risk at the
moment."

Rajan added that he's more concerned about the possibility that a
run on the currency will be triggered by foreign private investors
abandoning the dollar than the risk that international central banks
will diversify away from U.S. assets.

"The first action will come from foreign private investors, who have
no motives other than returns," he said.

The U.S. government has long argued that China's yuan is undervalued
against the dollar, leading to a large bilateral trade deficit
between the U.S. and China.

The Chinese authorities are very slowly moving towards a more
flexible currency regime, having abandoned a pure dollar peg in July
in favor of fixing the yuan against a basket of currencies.

Since that move, however, the yuan hasn't moved much against the
dollar, and U.S. politicians and industrial lobby groups continue to
call for a stronger yuan.

But Rajan said a sharp appreciation in the Chinese currency could be
more of a curse than a blessing for efforts to rebalance the global
economy. Although a sharply stronger yuan would boost Chinese
consumer demand by making imported goods cheaper, it could also slow
the country's economy by hitting its exports.

"A huge step appreciation (in the exchange rate) would do more harm
than good, " Rajan said.

He added that the IMF advocates a more gradual approach to allow the
yuan to respond to market forces more flexibly. The IMF is also
urging the U.S. to cut its budget deficit, and pressing the European
Union and Japan to implement structural reforms that will boost
their long-term growth potential.

But Rajan said there is a risk that before these actions are taken
to rebalance the global economy, rising protectionism will lead to
weaker growth.

"The...worry is that before (these adjustments) happen, we'll have
much greater protectionist forces raising their head, Rajan said.

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