Wed, Jul 16, 2003 - Page 11 News List

China sets plans to adjust yuan

MONEY MOVES Economic authorities want to give the yuan a chance to climb against the US dollar by relaxing the currency's close link to the greenback

BLOOMBERG

China reaffirmed its plans for an eventual relaxation of the currency's link to the US dollar, while ruling out any immediate change.

The nation needs to "maintain the stability of the yuan, which will provide the foundation to continuously improve the exchange-rate mechanism," the People's Bank of China said in a statement on its Web site in Beijing after a meeting yesterday between Governor Zhou Xiaochuan and other bank officials.

China is considering ways to alleviate pressure from overseas to allow the yuan to appreciate against the dollar, the state-owned China Daily newspaper today reported, citing an unidentified person at the central bank. The US, Japan and the EU have all called for China to adjust the yuan's link to the dollar, currently at about 8.3 yuan per dollar.

Investors have been betting China will respond to these calls by widening the yuan's trading band against the dollar, a move that would allow the Chinese currency to appreciate. China has since 1995 restricted movement of the yuan against the dollar to 0.3 percent above and below a fixed rate of 8.277 yuan per dollar.

The discount of one-year non-deliverable forwards, which reflect trader expectations of the yuan's future value, traded at 1,440 at 12:20pm in Hong Kong. The discount implies the Chinese currency would strengthen to 8.1330 per dollar if freely traded.

"China may widen the trading band as early as next year," said Michael Preiss, chief investment strategist at CFC Securities Ltd. in Hong Kong. "The yuan is undervalued by close to 15 percent."

Those calling for a yuan revaluation point to China's rising foreign-exchange reserves as evidence the currency is undervalued.

The nation's foreign-currency holdings -- the second-largest in the world after Japan -- at the end of June stood at US$346.5 billion, up from US$340 billion a month earlier.

The dollar has weakened 8.2 percent against a basket of six major currencies, including the euro, yen and British pound, in the past year, according to Bloomberg data. The US currency dragged the yuan with it, helping China sell goods to and attract invest from Europe, Japan and the UK.

The nation had a US$2.1 billion trade surplus in June and last year overtook the US to become the world's top recipient of foreign direct investment. In the first half, China attracted US$30.3 billion of foreign investment, about a third more than a year earlier and 11 times the amount South Korea received.

US Treasury Secretary John Snow in late June said China is considering widening the trading band for its currency. Japanese Finance Minister Masajuro Shiokawa said in February Japan wants China to abandon its currency peg.

European Central Bank President Wim Duisenberg last week said "the large and fast-growing economies in Asia" have "an exchange-rate policy which links their currency to the dollar, despite the fact that their economic developments at times are very different from those in the US."

China's economy is the second largest in Asia, after Japan, and is growing at the fastest pace among the 12 biggest economies in the Asia-Pacific region.

In the first quarter of this year, China's economy grew 9.9 percent from a year earlier, almost five times faster than the US.

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