Sun, Jul 24, 2005 - Page 10 News List

China says rate change won't help US

TRADE The head of the People's Bank of China added that Beijing cut the yuan's dollar peg to meet its own economic needs, not due to foreign pressure


A woman counts Chinese banknotes in a savings office in Hai'an in China's Jiangsu Province on Friday, a day after China's revaluation of its currency.


Beijing's move to cut its currency's link to the US dollar will do little to narrow huge US trade deficits with China, the head of the Chinese central bank said Saturday.

The remark came after US commentators said the decision -- which could make Chinese exports more expensive -- might help to repair the growing US trade imbalance with China.

"China's exchange rate reform won't have too much influence on US deficits," Zhou Xiaochuan (周小川), governor of the People's Bank of China, said at a conference of bankers.

It was his first public comment since the surprise announcement on Thursday.

The decision to remove the dollar peg followed years of lobbying by the US and other trading partners, who said China's currency was undervalued and gave Chinese exporters an unfair price advantage. The US trade deficit with China hit a record-high US$162 billion last year.

The central bank pushed up the yuan by 2.1 percent against the dollar, and said it was adopting a more flexible system that could let it rise further.

Zhou said China took the step to meet its own economic needs -- not because of foreign pressure.

"It is a requirement of our reform, sustainable development and stability. It is not a result of discussion and consultation with others," he said.

Beijing decided the time was right because of progress in Chinese financial reforms and stable growth of the world economy, a central bank spokesman said in comments published yesterday in the main Communist Party newspaper, People's Daily.

It was the first time Beijing had given reasons for the timing of its decision.

The bank spokesman cited "substantive progress in various financial reforms," including efforts to create more market-based interest rates and foreign-exchange management.

The announcement on Thursday said Beijing would switch to a system based on an unspecified basket of foreign currencies.

In trading on Friday on China's tightly controlled foreign-exchange market, the yuan strengthened to 8.11 to the US dollar, from the 8.277 level where it had been set for more than a decade. That meant 1 yuan rose in value by about US$0.0025 to US$0.1233.

The US and EU welcomed the change, which they hope will help their companies compete with a flood of low-priced Chinese goods that they say threaten thousands of jobs.

A major US trade group, the National Association of Manufacturers, said Thursday that the step had the potential "for beginning to correct the huge trade imbalances that have been created by distorted currencies."

The central bank spokesman noted that China began allowing the yuan's value to fluctuate slightly in 1994, but tightened controls after the 1997 Asian financial crisis.

"Along with the gradual weakening impact of the Asian financial crisis, in recent years China's economy has experienced sustained, steady and rapid development, economic structural reform has witnessed continuous deepening [and] new progress has been made in the financial field. All these have helped create conditions for improving the yuan exchange rate mechanism," the spokesman said.

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