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China's central bank chief reaffirms growing 'flexibility' for yuan

Section: Daily Dispatches

From The Associated Press
via Yahoo News
Sunday, October 1, 2006

The flexibility of China's currency is gradually being expanded as the influence of market forces grows stronger, the nation's central bank chief said.

In an interview to be published in Monday's edition of the Chinese-language Caijing magazine, People's Bank of China Governor Zhou Xiaochuan reaffirmed China's principle of carrying out gradual foreign exchange reform, and said the importance of the basket of currencies to which the yuan is referenced will diminish.

Zhou gave the interview in mid-September following the International Monetary Fund and World Bank meetings in Singapore, and U.S. Treasury Secretary Henry Paulson's visit to China.

Caijing, a weekly, is widely respected for its investigative and financial articles.

"China's policy direction on its exchange rate reform is clear cut: to gradually expand flexibility," Zhou said in the interview, a copy of which was seen by Dow Jones Newswires.

"Currently, we are gradually allowing market supply and demand to play a greater role. The weight of the role of the basket currency reference is slowly weakening, while market factors are slowly strengthening."

In July 2005, Beijing revalued the yuan by 2.1 percent against the U.S. dollar, and scrapped its 11-year-old de facto dollar peg to begin referencing the yuan to a basket of currencies.

Since then, the yuan has risen about 2.6 percent, which some trading partners say is too slow, especially as China's economy has powered ahead at high growth rates and its trade surplus has ballooned.

Zhou acknowledged that some participants at the meetings in Singapore wanted the process leading toward full convertibility of the yuan speeded up.

"The central bank chiefs of some countries have started to ask whether to put a portion of their reserves' assets in yuan," he said.

Zhou said China's central bank has its own idea of the amount of "hot money" or speculative flows entering China. He didn't give any estimate, but said the pressure from speculative capital shouldn't be overestimated.

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