China: Basic Work Done for Yuan Reform
Thu Nov 4, 2004 06:20 AM ET
BEIJING (Reuters) - China's top financial officials pledged to make the yuan currency more flexible, saying fundamental preparations had been made but stressing the need to avoid volatility, state media said on Thursday.
The remarks intensified market speculation Beijing may hasten steps to adopt a market-oriented currency and allow the yuan, pegged against the dollar around 8.28 since the 1997-98 Asian financial crisis, to rise in value.
The knee-jerk market reaction when China sprang its interest rate surprise last week was that the rate hike may push back the timeframe for a yuan revaluation. But many analysts now say a yuan shift could happen any time.
"A perfect renminbi exchange rate mechanism, while keeping the renminbi (yuan) basically stable at a rational and balanced level, is the direction and goal of exchange rate reform," Li Ruogu, deputy central bank governor, was quoted by the Financial News as saying.
"We have already made a host of fundamental preparations and achieved active progress," he was quoted as saying. Li did not elaborate.
The currency reforms would proceed in a "gradual and steady" manner by taking into account banking reforms and the impact on domestic and global economies, Li was quoted as saying.
The China Reform Daily quoted Guo Shuqing, head of the State Administration of Foreign Exchange, as saying China hoped to have a flexible yuan, but would have to control financial risk.
"Stability does not mean there will not be flexibility. China also hopes to have certain flexibility in the exchange rate, but will control volatility and possible crisis," he was quoted as saying, without giving a timeframe.
China would stick to the current reform goal of making the yuan exchange rate more market driven, Guo added.
"But the reforms of the exchange rate system are comprehensive reforms and should not be simply viewed as a revaluation," he said.
CONSISTENT
The media reports prompted financial markets to bet the yuan will be four percent higher against the dollar in one year's time compared to the pegged rate, currency dealers said.
The premium on one-year non-deliverable yuan forwards, hedging instruments used to bet on change in the tightly controlled currency, rose to more than 3,000 points, the highest premium in more than six months.
Beijing has come under increasing pressure in recent years from countries, such as the United States, to free up the yuan. They say China derives an unfair trade advantage from an undervalued currency.
Chinese authorities have pledged to make the yuan more flexible through reforms, but in their own time and without being bullied.
Grace Ng, economist at JP Morgan Chase Bank in Hong Kong, said the remarks were in line with a growing belief that the government is thinking seriously about relaxing controls on the yuan.
"The interest rate hike last week indicated the government's intention to move more toward market-oriented style of macro-controls," she said.
"In fact, our view on the currency move is that we do think there is an increasingly significant chance that there will be a move on the currency in the next three to six months."
The forex regulator vowed on Tuesday to crack down on speculative capital inflows fanned by expectations of a possible yuan revaluation, saying they had affected the balance of payments and disturbed government efforts to cool the economy.
China has unveiled steps to free up capital outflows and restrict inflows in recent months to help take the heat off the yuan so that it could build a deeper, more balanced foreign exchange market.
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