U.S. dollar cause of currency instability-Says Chinese Central Banker Fan Gang & the 5th interest rate increase in China to come...... the last 2 in the past 3 weeks.
Monday, August 28, 2006 11:49:06 PM (GMT-06:00)
Provided by: Reuters News
SYDNEY, Aug 29 (Reuters) - The devaluation of the U.S. dollar, rather than a need to revalue China's yuan <CNY=CFXS>, was the major cause of currency instability, Fan Gang, a member of China's central bank monetary policy committee said in a paper delivered on Tuesday.
"The current problem is not RMB (renminbi, or yuan) revaluation, but dollar devaluation," Fan said. "This is the major cause of the current imbalance."
"This means that RMB revaluation will not solve the problem of United States' deficits, not only because China's surplus is not equivalent to United States' deficits ... but because the root of the problem does not lie in China."
The paper was delivered on his behalf at a conference at the Australian National University.
Fan, who was appointed to the committee earlier in August, said that since the 1990s China's labour productivity had increased more rapidly than wages.
"This is indeed a factor that might indeed make the RMB undervalued, although only by less than 1 percentage point annually," he said.
China had to step up to its responsibility to address global currency imbalances, but also had to consider the plight of its rural poor.
"From this point of view a 'managed float' is a correct exchange rate regime for a country such as China," he said.
Fan, director of the National Economic Research Institute, a Beijing think tank, said the world's choice of the U.S. dollar as its global currency standard had allowed the United States to spread its financial risks.
"It seems that no matter how large the U.S. fiscal deficits are, no matter how loose the monetary policies and how much the excessive liquidity provided are, the U.S. is not likely to run into financial crisis that other countries have faced," he said.
"This may delude, if not corrupt people and policy makers in the anchor country, as they may not see it as their problem".
The answer lay in a new currency standard that was independent of the interests of participating countries.
"The U.S. dollar is no longer a stable anchor in the global financial system, nor is it likely to become one, therefore it is time to look for alternatives."
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China to Tighten Monetary Policy
August 30, 2006
BEIJING -- China's central bank plans to tighten monetary policy next month as it struggles to prevent the economy from overheating, but this time it will target foreign-currency deposits, according to an internal document issued by the People's Bank of China.
According to the document, seen by Dow Jones Newswires, the central bank will raise the foreign-currency deposit reserve ratio for domestic and foreign commercial banks to 4% from 3%, effective Sept. 15.
The move, although modest, is the fifth tightening measure by the central bank this year and follows two increases in interest rates and two rises in commercial banks' yuan reserve ratio. The foreign-currency deposit reserve ratio still remains far lower than that for yuan deposits, which rose to 8.5% on Aug. 15.
Chinese financial institutions' foreign-currency deposits totaled $161 billion at the end of June, meaning the increase would take around $1.6 billion of liquidity out of the system.
A spokesman for the central bank said he couldn't confirm the increase in the foreign-currency reserve ratio.
"This belongs to the central bank's operations and is not a disclosable issue, so we can't confirm this information," he said.
Total foreign-currency lending, which makes up a small portion of lending in China, reached $157.7 billion at the end of June.
In the first six months of the year, banks extended $7.5 billion in new foreign-currency loans.
China last raised the foreign-currency deposit reserve ratio in October 2004 to 3% from 2%. That move became effective in January 2005.
Analysts said the latest initiative would complement measures already taken to drain liquidity and would deter banks from switching to foreign-currency lending to avoid controls.
"The motivation behind the central bank's move is to prevent commercial banks from extending more foreign-currency loans, given the PBOC has taken several measures to curb growth in yuan-denominated loans," said Lin Zhaohui, an analyst at Guotai Junan Securities.
A rise in the foreign-currency reserve ratio will discourage banks from giving foreign-currency loans to companies that can't get a yuan-denominated loan, said a banker at a Shanghai-based Japanese bank.
The latest move is a sign that China isn't finished tightening policy.
Less than two weeks ago, the central bank raised the benchmark one-year lending rate to 6.12% from 5.85% and the one-year deposit rate to 2.52% from 2.25%.
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China Calls Itself 'Victim'Of U.S. Dollar Glut
By RICK CAREW
August 29, 2006
BEIJING -- Excess supplies of U.S. dollars are behind China's latest problems with economic overheating, a Chinese banking regulatory official said in an interview published by the central bank-backed Financial News.
Yu Xuejun, director of the China Banking Regulatory Commission's Shenzhen department, was quoted as saying that the U.S.'s easy-money policy from early 2001 to the middle of 2004 helped inflate asset prices globally and pushed China's foreign-exchange reserves higher. "China, in reality, has become the biggest victim of the global overliquidity of the U.S. dollar," Mr. Yu said.
In July 2005, China revalued the yuan 2.1% and abandoned the yuan's de facto peg against the dollar in favor of referencing its value to a basket of currencies. The yuan's movement has remained closely tied to the dollar since the switch.
The U.S.'s easy-monetary policy also encouraged excessive demand for China assets, Mr. Yu said. Strong demand for yuan-backed assets by foreigners has meant the latest round of economic overheating hasn't resulted in a big increase in consumer prices, he said. China's consumer prices rose 1% in July from a year earlier. Mr. Yu said China's central bank would find it difficult to stem the rapid growth in domestic money supply because it has no control over U.S. monetary policy. |
