BIZCHINA / News
PBOC's Wu reaffirms China policy on stable yuan
(Reuters)
Updated: 2007-06-21 14:20
BEIJING, China -- China's deputy central bank chief on Thursday fended
off US pressure for a faster rise in the yuan, saying Beijing would stick
to its two-year-old policy of gradual appreciation.
The Chinese currency 100 renminbi (yuan) notes, fronted with an image of
former Communist Party chairman Mao Zedong. [AFP]
Wu Xiaoling, deputy governor of the People's Bank of China, was speaking
a day after US Treasury Secretary Henry Paulson called the yuan clearly
undervalued and said it did not reflect the reality of China's breakneck
economic growth.
"We will keep a normal floating range for the yuan and keep the rate
basically stable at a reasonable level, according to market conditions
both at home and abroad based on market supply and demand and with
reference to a basket of currencies," Wu told a forum.
The yuan has risen a further 6.4 percent since it was revalued by 2.1
percent against the dollar in July 2005 and untethered from a dollar peg
to float within managed bands.
The yuan traded on Wednesday at its highest level against the dollar
since the revaluation, but it eased slightly on Thursday.
US lawmakers say the currency remains seriously undervalued, thus handing
a big price advantage to Chinese manufactured goods at the expense of
American jobs.
But Wu said a stronger exchange rate was no panacea. She cited the
examples of Germany and Japan, which both retained big trade surpluses
despite powerful rises in their currencies.
Those countries balanced their external accounts by exporting capital,
she noted, adding: "Therefore the Chinese government hopes its companies
can go out under the capital account."
Beijing was developing a currency regime driven by supply and demand, but
outsiders had to realize that China's economic problems were structural
and could not be boiled down to its exchange rate.
And with a population of 1.3 billion, China could not rush the required
deep-seated changes.
"Therefore the outside world should be patient and believe in the
determination of the Chinese government to carry out reforms in a
market-oriented direction," Wu said.
Lessons from Asia's crisis
Wu was speaking at a conference on the lessons to be learned from the
1997/98 Asian financial crisis, when China won kudos for not devaluing
the yuan after a speculative attack toppled the Thai baht and several
other regional currencies.
She said China had recognized that a flexible exchange rate was important
for economic growth, hence the decision in 2005 to scrap its dollar peg
and the widening on May 18 of the yuan's daily trading band against the
dollar to plus or minus 0.5 percent from 0.3 percent.
The government was fully aware of the challenge posed by imbalances in
the economy and was implementing a series of polices to tackle the
problem, Wu said.
These included a more flexible exchange rate, adjustments to China's
trade and foreign investment policies, tweaking taxes, resource pricing
reform and environmental protection initiatives.
Other lessons from the crisis included the need for a healthy domestic
financial system, the imperative of international cooperation and the
capacity to deal with short-term capital flows.
"We should be alert to too much foreign capital chasing domestic assets,"
Wu said.
The importance of strong financial supervision had led to the
establishment of China's banking and insurance regulatory agencies.
Beijing had also speeded up reform of its state-owned banks, including
the sale of strategic stakes to foreign investors even though China was
awash with foreign currency reserves and wary of more capital inflows, Wu
said.
Similarly, the crisis showed the need for properly functioning financial
markets, which China was successfully building up.
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