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China favors shift to currency basket Original Source Link: (May no longer be active)
http://www.reuters.com/newsArticle.jhtml?type=businessNews&storyID=4904828http://www.reuters.com/newsArticle.jhtml?type=businessNews&storyID=4904828
China Favors Shift to Currency Basket
Thu Apr 22, 2004 04:56 AM ET
BEIJING (Reuters) - China wants to move toward a floating currency system that would link the yuan to a basket of currencies rather than just the dollar, the foreign exchange chief said in remarks published on Thursday.
No timetable was given, but the comments were the clearest indication yet of how China might reform its long-standing fixed currency policy, analysts said.
Beijing's bottom line was that the yuan's value must initially be kept stable if it moved to let market forces play a bigger role in setting the exchange rate, they said.
"We don't think that a fixed system is good. We think that a floating system is good," Guo Shuqing, head of the State Administration of Foreign Exchange, was quoted as saying by the Financial Times.
"This is an integrated, systemic approach. We have done a lot of research (on using a basket of currencies). In the past we had such a system. The floating system will also have some reference to a basket (of currencies)."
Asked about Guo's comments, a spokeswoman for the regulator said China was still exploring various ways to improve how the yuan's exchange rate was determined.
The yuan has been pegged to the U.S. currency since 1996 and trades in a razor-thin band from 8.276 to 8.280 under what Beijing calls a "managed float."
Markets have speculated China could still revalue the yuan, also known as the renminbi, at a stronger rate against the dollar or widen the band in which it is allowed to trade.
A shift to a basket system would tie the yuan's value to the combined exchange rate of a handful of currencies from major trading partners.
A basket would at least include the dollar, yen and euro, and might hold as many as seven other currencies, such as the South Korean won and Singapore dollar, analysts said.
POLITICALLY CHARGED WEEK
Critics of the peg, most notably U.S. manufacturers, say the peg makes Chinese goods artificially cheap on world markets at the cost of U.S. jobs.
The newspaper quoted Guo as saying Beijing planned to introduce flexibility into its exchange rate as part of reforms to loosen capital controls and give play to market forces.
Representatives of the forex administration and the central bank declined to comment.
The comments come just before a meeting of the Group of Seven (G7) economic powers on Saturday. The G7 comprises the United States, Japan, Germany, Britain, France, Italy and Canada.
Although China is not a G7 member, it has come under fire from the United States over its currency system. Yuan policy is thought to have been a hot topic in past G7 discussions.
Beijing has so far resisted pressure to revalue, saying it would make the yuan more flexible by introducing reforms in its own time.
"It's a very politically charged week with (Vice Premier) Wu Yi in Washington and the G7 meeting coming up," said Tai Hui, an economist at Standard Chartered Bank in Hong Kong. "It's not a coincidence that there is lots of talk about making the renminbi more flexible to prepare for talks this week."
Stephen Roach, chief economist for Morgan Stanley, said he firmly believed China should not tamper with the currency now.
"Lacking a freestanding banking system, and lagging on capital market reform, the Chinese economy needs an anchor and the currency is just that anchor," Roach told reporters in Beijing.
APPRECIATION PRESSURE EASING?
But most economists see Beijing acting in its own interest, rather than in response to foreign pressure.
"The yuan's virtual peg to the dollar cannot reflect China's overall picture of trade and investment," said Zhao Xijun, economist at the People's University in Beijing.
Beijing was treading carefully because it feared any change might fuel speculation that the yuan will be revalued, Zhao said.
"I don't think (the basket system) will happen in the very near future, but it's going to be a possibility in the next 18 months," said Jun Ma, economist at Deutsche Bank in Hong Kong.
Guo said it was not clear whether the yuan was undervalued, the FT said. The newspaper said Guo made it clear re-pegging the yuan to the dollar at a stronger level would not happen.
But full convertibility of the yuan is seen by some as a long way off because China's struggling banks lack modern financial tools needed to manage the risks from currency fluctuations.
Guo also said inflows of speculative capital from abroad were easing from an average of $12 billion a month in the first three months of the year to an estimated $11 billion this month.
Upward pressure on the yuan was also easing due to China's trade deficit in the first three months of the year, the possibility that capital flows would move toward recovering developed economies and expectations the U.S. Federal Reserve would raise rates this year, he said.
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