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]
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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.