Leading Chinese economists call for yuan move to basket of currencies
[Can someone explain to me how this even works? Pegging to a basket of currencies - mish]
Wednesday, May 26, 2004 3:48:37 AM
(Updating to add details, background, comment)
SHANGHAI (AFX-ASIA) - A group of leading economists, including a member of the central bank's influential monetary policy committee, has called for China to remove the long-standing peg from the US dollar and for the exchange rate of the yuan to be fixed to a basket of currencies
In a front-page piece in the official China Securities Journal, the group said that the decade-old peg of around 8.27 yuan to the US dollar should be dismantled in favour of a basket of currencies as an interim measure before moving to a floating rate system. "The question is not whether the yuan peg to the US dollar should be abolished, but when and how," said Yu Yongding, an economist at the Chinese Academy of Social Sciences. Zhong Wei, director of Financial Research Center at Beijing Normal University, argued that China's trade position is being hit by the weak yuan. He told AFX-Asia that the government will likely use this year to monitor the producer price index (PPI), an inflation reading which covers those companies which buy imported goods, before making its move. "It will probably happen next year," he said. "A change to the exchange rate is not likely to happen this year as the government will want to see what happens with PPI growth." Higher oil and metals costs sent the producer price index to 5 pct in April, its highest level in at least three years. The consumer price index rose to a seven-year high of 3.8 pct last month, still below the central bank's 5 pct target for this year. But the report quoted Yu as saying that Beijing should move now, with the yuan in a relatively strong position and as capital appears to be flowing into, rather than out of, the country. Both public and private-sector economists have argued that a move to a currency basket, weighted to reflect China's major trading relationships, would effectively result in a modest revaluation and widening of the band in which the yuan currently trades because it would be exposed to a relatively strong euro and yen to balance the dollar. Li Yang, director of CASS' Institute of Finance and a member of the Monetary Policy Committee of the People's Bank of China, said that the move to a basket of currencies would also smooth the way to a floating yuan, the ultimate goal of the mainland's currency authorities
The domestic and international debate about China's currency policy has died down in recent months, replaced by speculation about an economic slowdown and an interest rate hike. But the current government campaign to rein in breakneck investment levels to avoid a hard landing run to the heart of the currency debate, the economists argued, noting that inflows of capital are dulling Beijing's ability to effectively tighten monetary policy. Beijing Normal's Zhong said that the People's Bank of China is having to conduct an expensive program to mop up excess liquidity through note issuance to stop it from spilling into the banking system
A similar argument was made in a closed-door speech by Guo Shuqing, head of the State Administration of Foreign Exchange, earlier this year
Zhong also argued that the currency was chipping away at China's trade position because the mainland's demand for raw materials is pushing up the price of imports, while exports are being sold too cheaply
China recorded a 10.76 bln usd trade deficit for the first four months of the year, up from 8.4 bln usd in the first quarter and from a surplus of 93 mln usd in the same period last year |
