CHINA / National
Calls for reform mark China revaluation anniversary
(Reuters)
Updated: 2006-07-21 14:26
Economists marked the first anniversary of the yuan's revaluation on
Friday with a barrage of policy recommendations, including a faster rise
in the currency and a wider trading band, to address China's economic
imbalances.
An employee arranges yuan notes at a branch of the China Minsheng Bank in
Nanjing, capital of east China's Jiangsu province. Economists marked the
first anniversary of the yuan's revaluation on Friday with a barrage of
policy recommendations, including a faster rise in the currency and a
wider trading band, to address China's economic imbalances. [Reuters]
Ba Shusong, vice head of the financial research institute at the
Development Research Centre (DRC), said Beijing needed to introduce
greater currency flexibility to help cool speculation and rein in excess
liquidity.
"Considering rampant liquidity, it's necessary to adopt a more flexible
exchange rate regime by widening its floating band," the China Securities
Journal quoted Ba as saying. His think tank reports directly to the State
Council, China's cabinet.
A wider trading band would also increase the cost and risk for
speculators of betting on the yuan, he said.
Under the new regime introduced a year ago, the yuan was revalued by 2.1
percent after being untethered from a decade-old dollar peg and it now
floats in managed bands with reference to a basket of currencies.
The yuan may move 0.3 percent up or down from a midpoint against the
dollar set each day by the central bank, although in practice it does not
move nearly so far.
The midpoint on Friday was set at 7.9897 per dollar, which is 1.5 percent
stronger than the 8.11 rate set in the revaluation.
Indeed, China International Capital Corp calculates that since the
revaluation the yuan's real effective exchange rate had fallen 0.3
percent by June 30, the China Securities Journal said.
Calls among economists to let the yuan rise faster to help ward off
economic overheating have gained momentum after data this week showing
the economy grew a surprisingly strong 11.3 percent in the second quarter
from a year earlier.
Pace To Quicken?
Goldman Sachs told clients to go long of yuan versus the dollar through
two-year non-deliverable forwards, offshore instruments used by
foreigners to bet on the future value of the yuan.
"Yuan appreciation is an essential part of a policy tightening package,
which can substantially rebalance the economy," economists Jens Nordvig
and Thomas Stolper said in a note.
Goldman said the risk was that the yuan would continue to appreciate at
the annual pace of 2 percent witnessed in the first half. But the bank
said it believed the pace would quicken. It expects a 6-7 percent
appreciation over the next 12 months.
Xia Bin, head of the financial research institute at the DRC, called for
faster yuan appreciation to tackle problems arising from excessive
banking liquidity, but he poured cold water on the idea that letting the
yuan rise would, by itself, help resolve global imbalances.
"The role of the yuan exchange rate in China's trade with the United
States is limited, but that does not mean that we should give up our
efforts to deepen exchange rate reforms," Xia told the China Business
News in an interview.
Xia called for the United States to do its bit to correct global
imbalances and not just rely on currency adjustments in China.
Xia said allowing the yuan to appreciate 2-3 percent a year would not
have a big impact on China's economy.
He Fan, an economist at the Chinese Academy of Social Sciences, a
government think tank, said he believed China could live with a faster
yuan appreciation of 5 to 10 percent.
"We cannot use the exchange rate as the only lever to tackle investment
overheating and trade imbalances, but the exchange policy must be part of
a package of policy measures," the China Securities Journal quoted him as
saying.
The government has promised deep-seated structural changes to boost
consumption and reduce savings and is also considering a cut in tax
rebates for exporters.
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