Mon, Apr 25, 2005 page12

• Beijing may speed easing of yuan peg

  CURRENCIES China may advance its schedule for allowing a more flexible exchange rate because of overseas interests, the nation's chief banker said

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  China may accelerate preparations to loosen the tie between its currency and the US dollar in response to intensifying international pressure for the change, central bank Governor Zhou Xiaochuan (周小川) said.

  "If there is more pressure from outside, it will force us to speed up our reform," Zhou said at the Boao Forum in southern Hainan Island on Saturday, the first time China's government has said it may alter its schedule for the exchange rate because of overseas interests. He didn't give a timetable.

  Finance ministers from the Group of Seven industrial nations last weekend stepped up calls for China to ease the yuan's decade-old peg to the dollar, which the US, Japan and Europe say gives the nation an unfair trade advantage. A more flexible yuan may help China contain inflation and money supply growth amid record foreign-exchange inflows.

  "There's no urgency to take the measure," said Bert Hofman, lead economist at the World Bank in Beijing. "For now, they are managing quite well the capital inflows. Despite the buildup in foreign reserves, monetary growth is fairly modest."

  China's central bank buys and sells dollars to keep its currency at about 8.3 to the dollar, regardless of market developments. Critics say the yuan became undervalued as the dollar declined in recent years, giving Chinese manufacturers a price advantage that's helped drive the US trade deficit to a record and hampered economic growth in Europe.

  "We're encouraged that they've stated that they want to move toward flexibility," said US Treasury spokesman Rob Nichols.

  "We're not aware of a formal timetable, but certainly in our view, moving toward flexibility as soon as possible would be most welcome," he said.

  China's foreign reserves, the world's second-biggest after Japan's, jumped 50 percent to an all-time high of US$659.1 billion at the end of last month from a year earlier, as exports surged and investors bet the government will let the yuan appreciate.

  Zhou said China welcomes international pressure because it will force the nation to speed up needed financial reforms. Still, "we don't see that the pressure is that strong right now," he said.

  US Treasury Secretary John Snow, who led the G-7's April 15-16 gathering in Washington, last week called for China to embrace a more flexible exchange rate immediately.

  Canadian counterpart Ralph Goodale said China should understand there is a "freight train coming" as the US Senate and EU weigh tariffs or import restrictions on Chinese goods.

  The G-7's sharper rhetoric marked a shift in the group's efforts to coax the world's fastest-growing economy into ending the peg. Some investors said the strategy might backfire, making China less likely to revalue because its leaders won't want to be seen as bowing to outside influence.

  "We have a very clear target in this regard, but we have our own sequence," Zhou said at the two-day gathering of regional leaders. "We are doing some preparation, for example the reform of the financial sector, to enlarge the role of the foreign-exchange market."

  Zhou also said overseas manufacturers that complain about the yuan's value should first consider their competitiveness in the international market.

  "For those companies with real competitive advantage, they will not have to be concerned about the exchange rate," he said.
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