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China urges patience on yuan reform

By Dong Zhixin (chinadaily.com.cn)
Updated: 2007-06-21 15:43

Deputy central bank governor Wu Xiaoling speaks at a forum on the 10th anniversary of the Asian financial crisis in Beijing June 21, 2007. [sina]

China urged on Thursday other countries to be patient on yuan exchange rate reforms and said a stronger renminbi is no panacea.

The main problem China is facing is the economic imbalance caused by the high-flying surplus in both current and capital accounts, which cannot be solved by yuan appreciation alone, said deputy central bank governor Wu Xiaoling at a forum in Beijing.

China is taking measures to enlarge citizens' income, boost domestic consumption, and increase imports and reduce exports, Wu told the forum on the 10th anniversary of the Asian financial crisis.

"However, China is a big country in the process of economic transformation and needs more time," she said. "So we hope the other countries can be more patient with China."

She went on to cite the examples of Germany and Japan, saying a stronger exchange rate alone was not the solution. The two countries 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."

To that end, China is loosing controls on overseas investment by domestic companies and individuals. In the latest move, the China Securities Regulatory Commission Wednesday gave the go-ahead for Chinese securities and fund-management firms to invest overseas.

Wu pledged to keep the yuan exchange 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.

Her remarks came after the International Monetary Fund (IMF), under pressure from the United States, released new rules to give "clear guidance to our members on how they should run their exchange-rate policies, on what is acceptable to the international community and what is not."

The new rules enabled IMF to declare a member nation a currency manipulator if the result of its policies is in "fundamental exchange-rate misalignment" or "large and prolonged current-account deficits or surpluses."

The major difference between the old and new rules is the new one discards the requirement that IMF should prove the country concerned intentionally uses its exchange rate to make its exports cheaper.

In response, China's central bank, the People's Bank of China (PBoc) called on the IMF to pay attention to each nation's circumstances.

"An unregulated and massive adjustment will not only worsen external instability, but also influence the sustainability of domestic economic growth, and therefore global growth and the stability of international financial market," the PBoC said in a statement.

Chinese analysts called the new IMF rules a product of heavy US pressure. American lawmakers, manufactures and businesses are accusing China of keeping the yuan artificially low, by as much as 40 percent, to give an unfair advantage to its exports.

Last week, US law-makers unveiled legislation which would punish countries with "misaligned" currencies, hours after the Bush administration declined to cite China as a currency manipulator.

As a reaction, the yuan has repeatedly hit new highs against the US dollar in the last few days, breaching the 7.62 barrier. That marked a rise of 6.4 percent since China ended a peg to the US dollar and revalued the yuan by 2.1 percent in July 2005.