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S&P says China currency float would be dangerous

Any floating of the yuan by China would be dangerous and may hurt the banking system, jeopardizing the country's credit rating, Standard & Poor's (S&P) said.

"Any flotation of China's currency would be dangerous and could damage the sovereign's creditworthiness," Singapore-based S&P analyst Ping Chew (周彬) said in a report.

S&P rates China's long-term foreign currency debt at BBB, the ninth level on its 10-step investment-grade rating scale.

"Lifting of exchange controls at the moment could be risky because Chinese banks are ill-equipped to handle volatility in the exchange rate," Chew said in the report. "Beijing may choose to peg its currency to a trade-weighted basket of currencies rather than the US dollar."

The yuan has traded in a narrow range around 8.28 yuan per US dollar since 1994. Officials from the US and Japan have suggested the country should abandon the link, which has boosted China's economy, Asia's second largest, by making its goods cheaper abroad.

Chinese yuan forward contracts rose to a record today amid expectations G7 nations may discuss China's currency policy, adding to pressure on the Asian country to move toward a more flexible exchange-rate regime. Finance ministers and central bank chiefs from the G7 industrialized nations will gather in Dubai this weekend.

China does not plan to revalue its currency in the near term, despite speculative and political pressure to do so, state media indicated yesterday.

China will keep the value of the yuan stable but gradually allow it to trade in a wider range, the state-run Economic Daily quoted Li Yang, a member of the central bank's monetary policy committee, as saying.

Repeating earlier pledges, Li said China would move toward a "more elastic foreign exchange regime," the Economic Daily report said.

Weak currencies can help keep a country's products cheap on international markets, boosting exports. US lawmakers have threatened tariffs on Chinese imports, charging that currency controls are unfairly contributing to China's US$103 billion trade surplus with the US.

"It's the issue of timing. There are a lot of other issues to be dealt with apart from the currency," said Qu Hongbin, chief economist at HSBC in Hong Kong.

"A floating rate, widening the trading band, those sorts of issues have been discussed for many years," Qu said.
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