Chinese govt. economist says yuan requires big revaluation

Section:

From Reuters
Sunday, January 21, 2007

http://asia.news.yahoo.com/070121/3/2w3xo.html

BEIJING -- China's policy of allowing the yuan to gain a modest 3-5 percent a year is not sustainable as the cost of preventing a faster rise will crush the central bank, a Chinese economist said.

Zhong Wei, a professor at Beijing Normal University and an editor of a magazine run by the State Administration of Foreign Exchange, told a weekend forum in Beijing that China needed another revaluation to build up a properly functioning exchange rate system.

Advocates of a second administered revaluation are in a minority. Chinese leaders, including Premier Wen Jiabao, have consistently said there will be no repeat of the 2.1 percent revaluation of July 2005, when the yuan was depegged from the dollar and set free to float in managed bands.

The yuan has climbed a further 4.3 percent since then, with heavy central bank intervention preventing a sharper advance.

"My view is quite clear: the current course of modest yuan appreciation is not sustainable; only a big revaluation can solve the problem," Zhong said.

"In the coming five years, the policy of allowing the yuan to rise 3-5 percent a year won't be sustainable," he added.

Zhong argued that the central bank has to issue a huge quantity of bills every year to soak up foreign-exchange inflows.

Not only is this costly for the central bank, but it ties up commercial bank funds that could otherwise be lent out, he said.

Zhong said his pessimistic outlook assumed no change over the coming years to what he called China's ill-functioning currency market, where the yuan is allowed to rise or fall by no more than 0.3 percent a day against the dollar.

Zhang Yansheng, a trader researcher with a think-tank affiliated with the National Development and Reform Commission, said Zhong's views were unfounded.

The exchange rate issue was about more than monetary policy, Zhang said. China could take a series of measures in the areas of trade and investment to reduce its balance-of-payments surplus and so avoid Zhong's revaluation scenario.

Zuo Xiaolei, chief economist with Galaxy Securities, agreed that the yuan's exchange rate alone was not the answer to China's economic imbalances.

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