BEIJING: China, fresh from overtaking Japan as the world’s biggest holder of foreign exchange reserves, raised the prospect on Tuesday of letting market forces play a greater role in setting the value of the yuan.
The comments by central bank chief Zhou Xiaochuan, though a restatement of existing policy, follow intense US pressure on Beijing to cut its big trade surplus with the United States.
The yuan is the focus of US pressure because China has not allowed the currency to rise far since revaluing it by 2.1 percent last July and cutting it loose from a decade-old dollar peg to float within managed bands.
“Half a year after the foreign exchange reform, we can see that most Chinese companies have weathered this reform thanks to hard efforts, though a small number of industries has been greatly affected,” Zhou said in a March 20 speech posted on the central bank’s Web site (www.pbc.gov.cn) on Tuesday.
“Based on this, we think we can let market supply and demand gradually play a bigger role in the currency float,” Zhou, the governor of the People’s Bank of China (PBOC), said.
The yuan, also known as the renminbi (RMB), rose as high as 8.0207 per dollar on Tuesday, its strongest level since July’s reforms. But its cumulative gain since July is just 1.1 percent.
Qu Hongbin, an economist with HSBC in Hong Kong, said Zhou was striking the right tone for a US audience ahead of President Hu Jintao’s visit to Washington on April 20. “The underlying message is that ‘we understand it’s in our national interest to make the RMB more flexible over time but this needs to be gradual, so don’t push us too hard,” Qu said.
The release of Zhou’s speech coincided with a report in the official China Business News that China’s foreign exchange reserves grew $8.5 billion in February to $853.7 billion, surpassing Japan’s total of $850.1 billion.
Unimaginable revaluation: Stephen Green, an economist with Standard Chartered Bank, said China’s stash dwarfed Japan’s when measured as a share of each country’s gross domestic product.
China’s reserves have ballooned in recent years as the central bank, in order to hold down the yuan, has bought most of the dollars generated by a growing trade surplus, inflows of foreign direct investment and speculative capital. But Green called another one-off revaluation ‘unimaginable’.
He said the central bank’s priority was to assemble the nuts and bolts of China’s currency market and gradually let the yuan move more freely.
“The PBOC is committed to this,” he told reporters in Beijing. “Everything else is secondary at the moment.” Green forecast that the yuan would reach 7.80 per dollar by year’s end.
Washington believes the yuan would be worth a lot more than it is now if it were freely traded, given China’s big trade surplus, strong productivity and hoard of reserves. The reserves have increased by $17 billion a month on average during the past five months. At that rate, China’s stockpile would top $1 trillion before the end of the year. But Zhou said the reserves were not high, given China’s foreign debts, the dividends foreign investors need to remit and the risk speculators pouring money into China might turn tail.
He said the lesson of the economic transition of the former communist states was that shock therapy did not work. “China, as a big developing country with great employment pressure and a fragile financial system, can take only a gradual, controlled approach to adjusting policy,” Zhou said. Reuters
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