Sat, Jul 05, 2003 - Page 11 News List

China in a quandary over yuan


For nearly a decade, Beijing has tied its currency tightly to the US dollar and kept it from trading in global markets -- a strategy that brought stability and helped shield China from the 1997 Asian financial crisis.

But as exports surge, China is facing growing demands to raise the value of the yuan.

Washington and other governments complain the currency is too cheap and gives Chinese exports an unfair advantage, hurting non-Chinese companies and wiping out jobs in countries trying to compete with China.

Officials in China say they have no immediate plans to alter the exchange rate or let the yuan trade freely. But they are looking at ways to overhaul currency controls to help the country's businesses and to lessen foreign pressure for a stronger yuan.

"We do have several plans under study, but they can't be disclosed before it's officially announced," said an official of China's State Administration of Foreign Exchange who declined to identify herself.

Large amounts of dollars, yen and other foreign currency flow into China, but strict controls keep most of it from leaving the country, allowing Beijing to amass US$340 billion in foreign reserves as a buffer against fiscal instability in a crisis.

Possible changes that could lessen demands to raise the value of the yuan include easing those rules to let Chinese companies and individuals obtain more foreign currency to invest or bank abroad, economists said.

"Then the potential outflow can start to balance the huge inflows, which have been putting pressure on the yuan to rise," said Frank Gong, an economist in Hong Kong for Bank of America.

China's central bank has kept the yuan fixed at about 8.28 to the US dollar since 1994.

The yuan is allowed to fluctuate, but only by a fraction of 1 percent, in closely supervised trading by those who have cleared official hurdles required to obtain foreign currency.

The system of controls insulated China from the upheaval of 1997, when traders drove down freely traded Asian currencies, causing financial collapse in Thailand, Indonesia and elsewhere.

But the controls prompt complaints from foreign investors who have trouble taking home profits and by Chinese companies hoping to expand abroad.

US Secretary of the Treasury John Snow, visiting Shanghai last month, said Washington hopes to see China adopt more flexible exchange rates.

"We understand that the Chinese government is interested in moving toward market-based, flexible exchange rates and that is something we support," Snow said. "China has indicated ... that they intend to create more flexibility on the renminbi [yuan] and they are to be encouraged in doing so."

Maintaining the dollar link is an increasingly complex task for regulators. The state newspaper 21st Century Business Herald reported on June 30 that China's central bank, even with currency controls, has to buy huge amounts of dollars every day to stabilize the yuan, though the report didn't disclose how much it has to purchase.

A spokesman for the central bank wouldn't give any details of the purchases or possible policy changes.

China could also aid the situation by widening the trading band, or the amount that the yuan is allowed to fluctuate, economists say. Such a move would reduce the need for the central bank to intervene in the market.

Chinese officials say eventually the yuan will be allowed to trade freely. But they scrapped a plan to relax controls by the late 1990s and now won't publicly set a date.

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