China signals yuan policy shift to cushion growth

China is under pressure to abandon the yuan exchange rate peg. (REUTERS)

China flagged yesterday it will let the yuan resume its rise at some point as it unwinds the super-loose policies it has been pursuing to prop up the world's third-largest economy.

China is under intense pressure from the United States and Europe to abandon the exchange rate peg it instituted of about 6.83 yuan per dollar since mid-2008 to preserve the competitiveness of its exporters during the international financial crisis.

Speaking during the annual session of China's parliament, Central Bank Governor Zhou Xiaochuan said Beijing would eventually have to drop this "special" yuan policy, one of a range of emergency measures taken to cushion the blow to growth.

"Practice has shown that these policies have been positive, contributing to the recovery of both our country's economy and the global economy," Zhou told a news conference. But he added: "The problem of how to exit from these policies arises sooner or later." China would have to be careful in withdrawing the extraordinary stimulus it has provided since late 2008.

"If we are to exit from these irregular policies and return to ordinary economic policies, we must be extremely prudent about our choice of timing. This also includes the renminbi exchange rate policy," he added.

Beijing fears a tide of capital will flow into China if speculators sense the yuan, also known as the renminbi, is strengthening. Zhou expressed concern about whether China's extensive holdings of US assets would retain their value, but said the dollar was still the currency that played the key role in global trade and investment flows.

Zhou was speaking after the bank issued a statement reaffirming a pledge made a day earlier by Premier Wen Jiabao to keep the yuan "basically stable" in 2010.

Economists say phrasing is broad enough to accommodate a renewed appreciation of the exchange rate – a decision that would have to be taken by Wen and the State Council, China's cabinet.

The People's Bank of China has already ordered banks twice this year to increase the proportion of deposits they must hold in reserve, rather than lend out, to gently slow the economy and nip inflation in the bud.

But, unlike Australia or Malaysia, the central bank has yet to increase interest rates, leaving investors anxious for clues as to how rapidly it might withdraw its stimulus. Zhou signalled the bank would tread carefully and "flexibly" in implementing its relatively loose pro-growth monetary policy.

"Even though the global economy is at present trending towards recovery, the influence of the crisis is still very serious," he said.

Chinese exports plunged 16 per cent in 2009 and Commerce Minister Chen Deming said it might take them two to three years to regain pre-crisis levels.

Chen defended Beijing's policies to help its exporters as being in line with global trade rules and said China's trade surplus reflected broad economic factors, not a cheap exchange rate. Turning to the hot topic of lending to local governments, the central bank chief warned banks they were taking risks by financing some projects that were unviable and by extending credit against the collateral of land because the price of that land might fall. Some economists have voiced growing concern about a surge of credit to local governments, which typically pledge land as backing for loans taken out by investment companies under their control. (Reuters)

 

Dollar still reigns supreme

 

The dollar is an extremely important currency and China is concerned about its value, the Chinese central bank governor said yesterday.

Zhou Xiaochuan, head of the People's Bank of China, roiled markets a year ago when he suggested that a new super-sovereign currency should someday become the world's main reserve currency. But speaking at a news conference on the sidelines of China's annual parliament, Zhou expressed a much more conservative view about the international currency order, emphasising that a healthy dollar was vital to the workings of the global economy.

"The US dollar is still an important currency, playing a key role in global trade, cross-border capital flows, direct investment as well as in determining whether we can smoothly overcome the global financial crisis smoothly," he said.

China, which has two-thirds of its $2.4 trillion (Dh8.81trn) of foreign exchange reserves invested in dollar-denominated assets, has said it hopes the dollar remains strong to shore up the value of its holdings. But Zhou said China's concerns were broader.

 

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