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China rebuffs G7 appeals to let yuan rise faster

Section: Daily Dispatches

Despite Pleas of G7, Yuan Will Stay
on Current Track, Central Bank Chief Says

From Reuters
Sunday, September 17, 2006

SINGAPORE -- China on Sunday brushed aside calls to take the yuan off its tight leash and said it would stick to its policy of letting the currency climb only gradually.

"The direction of reform is clear and our determination is firm. We will not backtrack," central bank chief Zhou Xiaochuan told reporters.

But Zhou, speaking a day after the Group of Seven industrial nations singled out China for not doing more to help iron out global trade imbalances, said currency reforms would be gradual.

Beijing would take account of China's ability to adapt to changes in the exchange rate as well as the country's international responsibilities, Zhou, governor of the People's Bank of China, said.

"We will keep the renminbi's exchange rate relatively stable at a rational and balanced level," Zhou said on the sidelines of the annual meetings of the International Monetary Fund and World Bank.

China revalued the yuan, or renminbi, by 2.1 percent against the dollar in July 2005 and scrapped a decade-old dollar peg in favour of a managed float.

Since then, to the frustration of critics who say the currency remains undervalued, the yuan has gained only a further 2 percent.

To keep the yuan stable, the central bank buys most of the dollars pouring into China from the country's record trade surplus, direct investment of more than $1 billion a week and inflows of speculative capital.

The intervention has swollen China's foreign currency reserves to a world record $954.5 billion.

Zhou reaffirmed his determination to gradually let market forces play a greater role in setting the value of the yuan, something that he said was already happening.

But Zhou played down market talk that a widening of the yuan's trading band was imminent.

Under the floating regime, the yuan may rise or fall by 0.3 percent a day against the dollar from a midpoint rate set every morning by the People's Bank. The daily band against other major currencies is plus or minus 3.0 percent.

Zhou said the question of widening the band had not arisen because the market had not yet pushed the yuan to its limits.

"I don't think the floating band is a serious matter. It depends on market movements," he said. "If you set a narrow floating band and market forces drive the rate to the limit, you have to consider that the band is probably too narrow and you should expand it. Fortunately, this has not yet happened."

The United States, with a record trade deficit, is particularly anxious to see a stronger yuan.

Zhou said Henry Paulson's visit to China this week, his first as Treasury Secretary, would mark an important step in economic relations.

But he said a shift in the yuan's exchange rate would have less impact on two-way trade than structural policy adjustments that, on the Chinese side, stoked domestic demand and reduced savings and, on the U.S. side, boosted the nation's savings rate.

On China's reserves, an international comparison showed that China had achieved very good returns, Zhou said.

"The structure of China's foreign exchange reserves up to now has been appropriate, but I can't say that there won't be an adjustment if it becomes necessary," he said.

The country's foreign exchange regulator said in remarks published on Sunday that China had already diversified part of its reserves, which bankers assume are invested mainly in dollar assets, but saw no need to make a big shift in future.

"Until now we haven't made a huge adjustment to our reserves composition because China's trade is largely in U.S. dollars," Hu Xiaolian, head of the State Administration of Foreign Exchange (SAFE), told the publication Emerging Markets.

Turning to the economy, Zhou said data for August had pointed to a slowdown in growth but it was too early to be sure.

The central bank has raised lending rates twice since April and also increased banks' reserve requirements twice to brake the economy, which grew 11.3 percent in the year to June, the fastest pace in a decade.

"Economic theory tells us that monetary policy usually works with a time lag. We should not be in too much of a hurry," he said.

"We will closely follow the economic indicators. Whenever necessary, we will use monetary policy as an instrument to adjust our economy," he added.

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