China restates yuan to rise gradually
(Reuters)
Updated: 2005-12-13 08:20

China on Monday poured cold water on speculation that its bulging trade surplus could trigger a dramatic shift in currency policy, restating instead that the yuan is likely to keep rising only gradually.

The German magazine WirtschaftsWoche reported on December 2 that China was preparing to revalue the yuan by 7.2 percent against the dollar on January 1.

Talk that something was afoot was further fueled the next day when finance ministers from the Group of Seven industrial countries urged China to make good on its commitment to a more flexible currency to help correct global economic imbalances.

But asked about a possible revaluation or a widening in the yuan's trading band, central bank chief Zhou Xiaochuan told reporters: "There is no such thing. It's nonsense."

China revalued the yuan, also known as the renminbi, by 2.1 percent against the dollar on July 21 and swapped an 11-year-old dollar peg for a managed float that lets the currency rise or fall by 0.3 percent a day against the dollar.

In practice, the yuan has since edged up just 0.4 percent against the dollar -- much to the irritation of some U.S. law-makers, who charge Beijing with deliberately holding down the currency to give its exporters a competitive edge.

Chinese policy makers are conscious of the friction that the trade surplus is generating and are striving to reduce the economy's reliance on exports and related investments.

The trade surplus tripled to more than $90 billion in the first 11 months of the year, and an influential official said that reducing the surplus should be one of Beijing's economic priorities next year.

To that end, the authorities will boost imports of raw materials and high-technology goods while strengthening consumption, Liu He, a vice head within a policy-setting division of the central government, told an economic forum.

China is also paving the way for a more flexible yuan by developing hedging instruments that banks and companies need to deal with increased currency risk.

But Yu Yongding, an adviser to the central bank, said it was not clear how much currency policy could do to reduce the surplus.

"If we are optimistic about China's economy, we cannot deny the premise that the renminbi will gradually appreciate. But how it appreciates and to what extent, and where the equilibrium exchange rate is, are very difficult questions to answer," Yu, a prominent academic who sits on the central bank's monetary policy committee, told the same forum.

Yu, for one, is optimistic about the outlook for the economy, which grew 9.5 percent in 2003 and 2004 and will come close to that mark once again this year.

"At the start of 2005, some people were predicting a slowdown in growth. That proved wrong. I want to make a bet that China will maintain economic growth around 9 percent in 2006," Yu said.

In most countries, such a long period of strong growth would have ignited inflation by now. But in China, gluts stemming from overinvestment in many industries is keeping a lid on prices.

Wu Jinglian, an economist with the Development Research Center, a think-tank under the State Council, said the failure to rein in capital spending had been the biggest flaw in executing the current five-year economic plan, which ends this year.

Wu said the solution was for China to change its very development model by letting the market, not the authorities, have more influence over the allocation of capital: "There are some fields where the government should keep its hands off."

Data from the National Bureau of Statistics underscored that inflation remains tame. Consumer prices in November rose 1.3 percent from a year earlier, up from 1.2 percent in October but below market forecasts of a 1.5 percent increase.

While the cost of food and services rose, the price of cars and other consumer goods that are in abundant supply fell.

"We still see strong service price inflation but some risks of core consumer goods price deflation," said Ben Simpfendorfer, a strategist with Royal Bank of Scotland in Hong Kong.