Sun, Jan 25, 2004 page5

• China unlikely to float currency

  LACK OF FLEXIBILITY An economist with the OECD said that Beijing needs to reform its domestic financial system to allow it to liberalize its capital accounts

  • AFP
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  China is unlikely to move soon to float its currency despite foreign pressure, but needs to reform its domestic financial system to gain greater flexibility in the exchange rate, an OECD economist said Friday.

  A move to float the dollar-pegged currency, the yuan, would require the Chinese authorities to substantially liberalize capital accounts and that cannot be done immediately, said the economist, who requested anonymity.

  "I don't see a compelling case to float the currency" at the moment, he said.

  His comments were at odds with renewed speculation of a near-term change in Chinese currency policy that surfaced Thursday at the elite World Economic Forum (WEF) in Davos, Switzerland.

  "One thing the authorities almost certainly don't want to be in a position of is to change it now, or say in a year from now, and then a year after that to have to change it again. That's a very dangerous situation," he said. "I think that they'll have to be fairly convinced that there's a permanent change in the underlying fundamental value of the currency before they actually move. I think it's too early to tell about that."

  A fixed exchange rate poses the problem of inflexibility, he said.

  "The lesson, I think, from the current situation is that they need to undertake as quickly as possible reform to the domestic financial system that will allow them to then liberalize the capital account so that they have the option of having greater flexibility in the exchange rate," he said.

  The economist, a China specialist at the Paris-based Organization for Economic Cooperation and Development, noted that China had accumulated a large balance of payments surplus because its domestic reserves banking system has been absorbing a lot of foreign exchange reserves.

  But it has been able to cushion the impact of those forex reserves by essentially selling central bank bonds for the banks, he said.

  "It's been able to sterilize the foreign exchange influence so far reasonably successfully," he said, but warned that a lot depended on whether the current currency flows persisted.

  About a year ago, when the dollar was stronger, he recalled, China was being told its currency was overvalued. Now the situation has flipped, and the Chinese are being pressured to strengthen it.

  Much of the heat is coming from US politicians who contend the yuan is undervalued, adding to a rising Chinese trade surplus and costing American jobs.

  Despite repeated denials by the Chinese government that it plans to alter the yuan's peg to 8.3 to the US dollar, some at the Davos gathering of leading politicians and business executives sense that change is in the wind.

  On Thursday, Victor Chu, chairman and chief executive of Hong Kong-based First Eastern Investment Group, told a WEF debate on foreign investment in China that the Chinese authorities could reassess the currency model by year's end.

  Overseas investors should consider exposing themselves more to the Chinese currency, he said.

  "We have a window of nine months. In the next nine months we want to really put money into new-producing assets in China," Chu said.

  If the authorities decided on a different model, Chu said he believed they would move very quickly.
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