China should be more flexible about exchange rates to reduce currency interventions and let the market play a bigger role, central bank adviser Zhou Qiren (周其仁) said.
The “root cause” of the nation’s swings between tight and loose monetary policy over the past several years, yet to be resolved, is an exchange-rate mechanism that involves intervention by the People’s Bank of China, Zhou said at an economic forum in Beijing yesterday.
STABILITY
Mandated to maintain currency stability, the central bank has sold yuan into the financial market to buy foreign currencies, which added liquidity, Zhou said.
The bank then was forced to tighten monetary policies to prevent that liquidity from fueling inflation, he said.
Premier Wen Jiabao’s (溫家寶) government has held the yuan at about 6.83 per US dollar since July 2008 to shield the country’s exporters from the global recession after allowing a 21 percent advance over the previous three years.
‘CONFLICT’
There is “conflict” between the bank’s intervention and its mission to manage liquidity and control inflation, said Zhou, also an economics professor at Peking University.
China this year must deal with the aftermath of allowing record lending last year to boost growth, Zhou said.
“Unless there are very forceful measures, that large amount of money will flow through the market,” Zhou said, citing the recent government crackdown on property.
“Even if you put a lid on in one place, it will emerge somewhere else,” he said.
Zhou, who earned a doctorate from the University of California, Los Angeles, was appointed last month as one of three academic advisers to the central bank.
RECOGNITION
On Saturday, a senior IMF official said in Washington that China recognizes the need to allow its currency to strengthen against the dollar and other currencies.
There is a “wide range of recognition that strengthening the currency is part of the policies needed to raise private consumption and help introduce a new engine for growth,” said Anoop Singh, the head of the IMF’s Asia unit.
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