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China and US agree to let yuan float, disagree on when

China and the US agreed yesterday that the yuan should eventually float freely, but Beijing resisted calls by the US treasury secretary to speed up the process, fearing it will worsen unemployment.

China's central bank governor, Zhou Xiaochuan (周小川), in comments that struck a conciliatory note but broke little new ground, said the yuan's value would eventually be determined by market forces.

US Secretary of the Treasury John Snow, under pressure at home to push Beijing into a revaluation to save US jobs, said he was heartened China was working towards a free-floating currency.

"On the currency issue in particular, I was encouraged to hear a reaffirmation of China's long-standing goal to move toward greater flexibility," Snow told reporters in Beijing.

"I was assured that interim policy steps are now being taken and progress in this area will continue," Snow said.

Among the policy steps he said he had discussed with Chinese officials were relaxation of capital controls that restrict the amount of foreign currency Chinese companies and individuals can take out of the country. He said Chinese officials also told him they were moving to loosen regulations on companies and individuals who want to invest abroad, a step he said could lead to an increase in the flow of Chinese money into American stocks and bonds.

He said he hoped that China would also move to create more opportunities for American financial firms to own asset management companies, and for American insurance companies to open branch offices around the country.

"These are interim measures that prepare an economy for a more flexible exchange rate system," Snow said. "It is to China's advantage to encourage flows both in and out."

While pleased by China's pledge to move towards a more flexible yuan, Snow urged faster relaxation of currency controls.

"The objective here is to get a commitment to move to a free-floating currency," he told a news conference, adding that he thought the US$103 billion US trade deficit with the US was "unsustainably large."

Beijing has made clear it won't be goaded into swift action, but Zhou repeated the government's line that it would reform the policy when the time was right.

"The market will play a bigger and bigger role [in deciding the exchange rate] and we will gradually allow the market to play a decisive role. At that time we will allow the exchange rate to have a bigger floating range," Zhou said.
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