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Mon, Jul 24, 2006 - Page 10 News List

China not planning revaluation

MONEY MATTERS Financial analysts believe that Beijing has no intention of strengthening the yuan in order to curb its enormous trade surplus

AFP , BEIJING

Cyclists pass a huge dollar sign on the wall of a construction site for a luxury apartment complex in Beijing last week. A year ago last Friday, China revalued the yuan by 2.1 percent and then loosened its decade-long link to the US dollar. Since then, the yuan has been allowed to rise a mere 1.4 percent against the dollar -- less than some currencies move in a day.

PHOTO: AP

One year after the Chinese currency was cut loose from the US dollar, Beijing is making clear in both word and deed that it plans no dramatic additional revaluation, despite calls for action.

A decision announced at the start of the weekend to raise banks' reserve requirements acted as a message that China will use monetary levers, not a more expensive currency, to dampen growth, analysts said.

"The signal from the Chinese administration is clear," said Divyang Shah, a London-based economist at IDEAglobal.com.

"This is that the economy, investment and money growth are going to be controlled by monetary policy and not via forex adjustments," he said.

The Chinese yuan hit a high of 7.9855 against the US dollar on Friday, exactly 12 months after it was cut loose from the US currency in a long-awaited but very modest revaluation.

Friday's peak meant the yuan has appreciated just a further 1.4 percent against the US dollar since a decade-old link was severed on July 21 last year with a 2.1 percent revaluation.

"There will not be another surprise one-off appreciation of the yuan through administrative measures," National Bureau of Statistics spokesman Zheng Jingping (鄭京平) said last week.

This is in spite of the fact that China could tackle many of its most formidable challenges -- including an economy that expanded by a frantic 11.3 percent in the second quarter -- by allowing the yuan to rise.

"All the problems have their root cause in the undervalued currency," said Qing Wang, an economist and strategist at Bank of America in Hong Kong.

Even for some government-employed economists, the case for revaluation seems clear.

"Current developments in China's domestic economy have made the adjustment of exchange rate policy even more urgent," Yu Yongding (余永定), an economist at the Chinese Academy of Social Sciences, said in a recent paper.

Daily currency movements may be modest, as they are limited to just 0.3 percent on either side of a level determined by the central bank, but they fail to reflect the work done in China to support further exchange rate reform.

This includes the addition of new currency pairs to onshore trading, expansion of market participants and the launch of forwards and swaps trading.

The reform wave has also seen the introduction of a market-maker system as well as an over-the-counter pricing system in the onshore forex market in January.

Offsetting those achievements, however, are deepening external imbalances, leading to a trade surplus that reached US$61.4 billion in the first six months of this year, a jump of 54.9 percent from the same period a year earlier.

China has also overtaken Japan this year as the world's largest holder of foreign reserves, adding over US$200 billion in the last year to push its stockpile to US$941.1 billion at the end of last month.

A stronger currency could potentially help solve some of the imbalances, but could also boost investment -- the very field of economic activity China wishes to curb -- by making imports of metals and other raw material cheaper.

"[That] could further encourage investment growth while at the same time act as a constraint on the export sector, which remains crucial for jobs growth," said Clyde Wardle, an economist with HSBC.

Philip Suttle, managing director of Barclays Capital, offered an alternative view on the job concerns.

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