Sat, Jul 30, 2005 - Page 8 News List

Yuan could use more loosening up

By Paul Lin 林保華

On the evening of July 21, China's Xinhua News Agency announced that the People's Bank of China had completed its yuan exchange-rate reform, thus putting an end to two years of confusion over the matter. Avoiding the term "revaluation," however, China instead called it "reform."

Moving from a peg to the US dollar to a more flexible exchange rate linked to a basket of currencies is obviously a reform of sorts. As for the managed floating exchange-rate system, the daily trading price of the US dollar against the yuan in the inter-bank foreign exchange market will continue to be allowed to float within a band of 0.3 percent of the central parity published by the People's Bank of China after the previous trading day's close.

This means that China is still controlling its currency's exchange rate, and that there is still a long way to go before we get a reformed and freely-floating exchange rate.

The US dollar to yuan exchange rate set the evening of July 21 was a revaluation of 2.1 percent from the price at the close of the trading day.

One thing that was left out of China's announcement was that this decision was a result of pressure from the international community. The main pressure to revalue the yuan over the past two years has come from the US. It has not been an unreasonable demand, nor will the results only be negative for China.

But because the US made currency revaluation a demand, China reacted by taking an ideological approach and tried to bargain to gain some advantages. Throughout this process, China also took the opportunity to whip up nationalist sentiment.

As a result, Chinese officials, academics and experts have repeatedly claimed that the US' demand amounted to interference in China's domestic affairs and a violation of China's sovereignty.

Some have even said that the US was trying to harm China and block its rise, and that China would be forever doomed if it accepted the demand. Even foreign experts have said that such a reform would not bring any advantage to China or the world.

Following the revaluation, however, all such talk has been replaced by praise. It is understandable that academics and experts on China's payroll would dance to Beijing's tune, but that even foreign experts would do so just shows the efficiency of China's "united front" tactics and the power of business interests.

All this praise also included some voices calling it unexpected, among those a few Hong Kong newspapers who thus indirectly promoted Premier Wen Jiaobao's (溫家寶) talk about a "subtle strategy." But some of us were expecting the change. In an interview on French national radio on the afternoon of July 20 about the Chinese economy, I said I thought the yuan would be revalued because China had put in place a plan for responding to sudden financial changes.

Serious problems in China's financial sector mean that a financial crisis could erupt at any time, and Beijing is worried that an appreciating yuan could set off such a crisis.

The response plan was revealed by Liu Mingkang (劉明康), chairman of China's Banking Regulatory Commission, at a commission meeting called on July 28 to discuss the implementation of a State Council-issued document. The document is still considered a state secret and has not yet been released.

The G8 summit earlier this month should have been an opportunity for the other states to put pressure on China, but the whole issue was avoided, making it obvious that there must have been a tacit agreement not to bring it up.

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