ADB urges China to loosen grip on yuan

The Asian Development Bank (ADB) yesterday urged Beijing to loosen its grip on its currency, saying a more flexible exchange rate would benefit China as well as Asia-Pacific countries.

The Manila-based lender entered the fray in the mounting debate over the value of the yuan as it released its 2010 development outlook, in which it said China needed to boost domestic consumption to curb its dependence on exports.

International critics have accused China of keeping the yuan undervalued to give its exporters an advantage by making their products cheaper. Beijing counters that the policy is needed for its manufacturers' survival.

"Now as the global economy picks up it would be in China's interests but also in the interests of the economies in the region to gradually shift towards greater exchange rate flexibility," ADB Country Director Robert Wihtol told reporters.

The bank said in its outlook report that Chinese policymakers may "tolerate" a slight increase in the yuan in 2010 and 2011 amid sustained economic growth, revived inflation and a ballooning trade surplus.

Speculation is growing that Beijing may soon alter its exchange rate policy as international pressure intensified for a stronger yuan – effectively pegged at 6.8 to the dollar since mid-2008.

US President Barack Obama told President Hu Jintao on Monday to adopt a more "market-oriented" exchange rate, but Hu said a policy shift would not help rebalance Sino-US trade.

The ADB also urged Beijing to step up efforts to boost domestic consumption, as a means of steering the nation away from its heavy dependence on exports and investment.

China should strengthen the social safety net and lift spending on education, healthcare and affordable housing to enable the country's 1.3 billion people to spend more on clothes and gadgets, the bank said.

"A greater emphasis on private consumption would promote economic growth and raise living standards," said the bank, which provides financial assistance to developing countries in the Asia-Pacific.

The ADB raised its 2010 growth forecast for China to 9.6 per cent from its previous estimate in September for 8.9 per cent growth.

The world's third-largest economy is likely to grow at a slightly slower pace of 9.1 per cent in 2011 as the government phases out massive stimulus measures introduced to combat the global financial crisis, the ADB said.

The more optimistic forecast follows a similar one from the World Bank after the rapid turnaround in China caught economists somewhat by surprise.

The ADB growth outlook is markedly higher than the government's own 2010 target of around 8.0 per cent.

China has powered out of the downturn – it grew 10.7 per cent in the fourth quarter of 2009 – on the back of $586 billion (Dh2.15 trillion) in economic stimulus spending and massive state-sanctioned lending.

A weaker-than-expected global recovery from the crisis and further trade disputes were the main risks for the future, the bank said.

China's next five-year plan, an economic blueprint set to be unveiled in 2011, was an opportunity for Beijing to "add momentum to restructuring efforts" necessary to ensure sustained growth in the years ahead, the Asian lender said.

Policymakers – who have acknowledged the need to retool the economy – could establish new targets for boosting private consumption and set out the policy adjustments needed to achieve such a target, it said.

Expanding the services sector – such as banking and insurance – would "strengthen the domestic engine of growth, generate new sources of employment and raise living standards", the ADB said.

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