Sun, Mar 07, 2010 page11

• Days of ‘special’ yuan policy numbered

  UNWINDING The governor of China’s central bank signaled that Beijing would tread carefully and ‘flexibly’ in implementing its relatively loose pro-growth monetary policy

  • REUTERS
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  China flagged yesterday that it would let the yuan resume its rise at some point as it unwinds the super-loose policies it has been pursuing to prop up the world’s third-largest economy.

  China is under intense pressure from the US and Europe to abandon the exchange rate peg it instituted of around 6.83 yuan per dollar since mid-2008 to preserve the competitiveness of its exporters during the international financial crisis.

  Speaking during the annual session of China’s parliament, central bank governor Zhou Xiaochuan (周小川) said Beijing would eventually have to drop this “special” yuan policy, one of a range of emergency measures taken to cushion the blow to growth.

  “Practice has shown that these policies have been positive, contributing to the recovery of both our country’s economy and the global economy,” Zhou told a news conference.

  “The problem of how to exit from these policies arises sooner or later,” he added.

  China would have to be careful in withdrawing the extraordinary stimulus it has provided since late 2008.

  “If we are to exit from these irregular policies and return to ordinary economic policies, we must be extremely prudent about our choice of timing. This also includes the renminbi exchange rate policy,” he said.

  Beijing fears a tide of capital would flow into China if speculators sense the yuan is strengthening.

  Zhou was speaking after the bank issued a statement reaffirming a pledge made a day earlier by Premier Wen Jiabao (溫家寶) to keep the yuan “basically stable” this year.

  Economists say that phrasing is broad enough to accommodate a renewed appreciation of the exchange rate — a decision that would have to be taken by Wen and the State Council, China’s Cabinet.

  The People’s Bank of China has already ordered banks twice this year to increase the proportion of deposits they must hold in reserve, rather than lend out, in order to gently slow the economy and nip inflation in the bud.

  However, unlike Australia or Malaysia, the central bank has yet to increase interest rates, leaving investors waiting anxiously for clues as to how rapidly it might withdraw its stimulus.

  Zhou signaled the bank would tread carefully and “flexibly” in implementing its relatively loose pro-growth monetary policy.

  “Even though the global economy is at present trending towards recovery, the influence of the crisis is still very serious,” he said.

  Chinese exports plunged 16 percent last year and Commerce ­Minister Chen Deming (陳德銘) said it might take them two to three years to regain pre-crisis levels.

  Speaking at the same news conference, Chen defended Beijing’s policies to help its exporters as being in line with global trade rules and said China’s trade surplus reflected broad economic factors, not a cheap exchange rate.

  Turning to the hot topic of lending to local governments, the central bank chief warned banks they were taking risks by financing some projects that were unviable and by extending credit against the collateral of land because the price of that land might fall.

  Land prices soared last year and critics fear a collapse in prices could expose the weakness of local government finances and sow a new crop of bad loans on the books of the nation’s banks.
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