China will be "more proactive and progressive" in letting the market set the
currency's value, Finance Minister Jin Renqing said.
"We have given the market a more important role in deciding the exchange-rate
level and the market is playing a more important role already," Jin said at the
end of a two-day meeting of 21 Asia-Pacific finance ministers in the Vietnamese
capital of Hanoi.
The yuan this week reached its highest against the dollar since China ended
its peg to the US currency in July 2005, after the central bank on Aug. 9 said
it would use exchange-rate policy to help cool export-led economic growth.
U.S. Treasury Secretary Henry Paulson, who attended the meeting, said a more
flexible yuan would help cut global trade imbalances.
"We could actually see a faster appreciation of the yuan over the next few
months'' as China seeks to slow the economy, said Hans Goetti, managing director
in Singapore at Citigroup Private Bank, which oversees about $1.5 billion in
Asia. "At the end of the day, China will decide, based on their domestic agenda,
how fast they will move."
He said Jin's statement didn't suggest a change in policy because it
emphasized a gradual strengthening.
China will "approach the reform in a more proactive and progressive way," Jin
told reporters. Currency changes won't take place "with one push," he said.
Stronger Yuan
A stronger yuan will make Chinese goods more expensive abroad relative to its
major trading partners and help narrow the U.S. trade deficit. U.S. lawmakers
blame China for holding the value of the yuan artificially weak to keep Chinese
products cheap on international markets.
Senators Charles Schumer and Lindsey Graham told Paulson in July they want to
see the yuan rise by Sept. 30, or they will proceed with legislation to impose a
27.5 percent duty on Chinese goods.
Last year, the U.S. trade deficit reached a record $716.7 billion, or 5.8
percent of U.S. gross domestic product. China's 2005 trade surplus reached a
record $102 billion, helping fuel an economy that grew 11.3 percent in the
second quarter.
Paulson, under pressure to push China to let the yuan appreciate, was on his
first visit to Asia since he took office two months ago.
The former Goldman Sachs Group Inc. chief executive officer has a reputation
as a China specialist, based on his 70 or so visits there before President
George W. Bush chose him to succeed John Snow.
'Currency Flexibility'
The world needs "currency flexibility in east Asia and China," Paulson told
students today at a university in Hanoi.
The yuan has gained 2 percent against the dollar since the People's Bank of
China ended the currency's peg to the dollar on July 21, 2005. The currency was
little changed at 7.9485 against the dollar as of 5 p.m. in Shanghai, according
to data Bloomberg compiled. It reached 7.9334 on Sept. 5.
Jean-Claude Juncker, the Prime Minister of Luxembourg and chairman of a
committee of euro-region finance ministers, said in April that "more could be
done" with Chinese "monetary decisions," though he said "we don't want to
lecture publicly our Chinese and Asian friends." German Deputy Finance Minister
Thomas Mirow told reporters yesterday the yuan will be discussed at next week's
G-7 meeting.
China's surplus with the European Union, its largest trading partner, surged
to 106 billion euros ($131 billion) last year, according to Eurostat. Chinese
data puts the 2005 deficit lower, at $70 billion.
Stall Inflation
Officials including Tang Xu, a research director at the People's Bank of
China, have said the country needs a stronger currency to stall inflation. The
yuan is a denomination of the renminbi, China's currency.
"I welcome the move by the Chinese authorities to ensure further flexibility
in the renminbi," Australian Treasurer Peter Costello told reporters in Hanoi.
"As China further develops, there will be a capacity to sequence reforms and
introduce further flexibility."
Restraints on the yuan are making it more difficult for China's central bank
to control the money supply and the surge in bank lending, which is fuelling an
investment boom the government is trying to cool.
A record trade surplus, rising foreign investment and inflows of capital
betting on a yuan appreciation have flooded the Chinese financial system with
cash. The World Bank says failure to cool expansion and lending might lead to a
slump in the world's largest consumer of copper, cement and steel.
Reserves Double
China's foreign-exchange reserves doubled in the past two years, reaching
$941 billion at the end of June, more than the value of Russia's economy in
2005.
China's holdings, which overtook Japan's as the world's largest in February,
could top $1 trillion this year, according to economists at Standard Chartered
Bank.
Jin reiterated the government's policy of "gradual" yuan reform, saying his
country's economy is too small for any changes to the currency's value to
balance global currency flows.
"China only occupies less than 5 percent of global GDP," he said. "I don't
think the China exchange rate can play such a great role in the imbalances of
the global economy."
China's government has said it must avoid rapid fluctuations in the yuan's
value because domestic financial institutions don't have enough hedging
experience and too many exporters, operating on thin profit margins, would be
put out of business.
"China will do it at its own pace, the way it suits them, and nobody else's,"
said Citigroup's Goetti.
