China yuan likely to stay fixed for long time-HKMA
Tue Nov 9, 2004 04:34 PM ET
By Thomas Atkins
GENEVA, Nov 9 (Reuters) - China is unlikely to relax controls that keep its currency tied closely to the U.S. dollar until after it manages a soft landing for its overheated economy, Hong Kong's chief central banker said on Tuesday.
Joseph Yam, chief executive of the Hong Kong Monetary Authority, said Chinese officials were grappling with so many reforms designed to cool the overheated economy while edging it away from state control, they would be unlikely to embark on potentially destabilising currency reform soon.
"Even though flexibility in the renminbi exchange rate is the declared intention, I don't think you'll see it until after this soft landing is achieved because it's a long-term issue," he said, speaking at a university event in Geneva.
"There is too much on their plate at this point in time," he added.
Yam, who runs Hong Kong's de facto central bank, said he had no direct knowledge of plans under consideration by mainland China, only his experience as a central banker to draw on.
Yam cautioned that U.S. pressure on China to liberalise its currency regime, which keeps Chinese exports priced cheaply versus American rivals, might backfire if China were then to sell even a fraction of its huge dollar-denominated reserves.
"I think that sometimes the Americans are shooting themselves in the foot by putting pressure on China," he said.
The yuan, also known as the renminbi, is pegged at about 8.28 to the dollar.
If a fixed currency regime like China's became flexible, Chinese authorities would almost certainly begin to diversify their foreign exchange reserves, now held overwhelmingly in dollars.
With around $500 billion in U.S. currency reserves under Chinese ownership, and an additional $1.5 trillion held by other Asian central banks, even a small shift out of dollars could have an enormous impact on financial markets, he said.
STATUS QUO...FOR NOW
Yam said he saw no "insurmountable difficulty" in maintaining the Hong Kong dollar's peg to the U.S. dollar despite speculative pressure on the territory's currency, and Hong Kong political authorities were unlikely to change its fixed regime.
"I think that the status quo will be maintained, although this is not my call (decision to make) but my reading of the politics in Hong Kong and in mainland China, which is that this is something that they wouldn't touch with a barge pole. It's working well. Don't touch it," he said.
Speculation that China might widen its currency peg to the U.S. dollar has increased since the mainland raised interest rates last week for the first time in nine years, indicating Beijing was now more willing to use market measures rather than administrative measures to cool overinvestment in its economy.
That has put upward pressure on the Hong Kong dollar, which has become a sort of proxy to the Chinese yuan with speculators betting Hong Kong could follow China and widen its currency trading band or even abandon its peg.
But in the long term, Hong Kong would be better served if its currency were tied to China and not the United States, Yam said.
"For the end game there is no better choice than the renminbi, (but) the status quo will be maintained for a long time to come," he said.
Many analysts believe it would be more appropriate for Hong Kong to link its currency to the yuan given the territory's growing integration with China.
The Hong Kong peg, at 7.8 to the U.S. dollar, was instituted in 1983 during a period of instability that accompanied early negotiations between Britain and China on Hong Kong's future. Hong Kong was returned to China in 1997 but was promised a high degree of autonomy.
When more Asian currencies become flexible, the region would benefit from an Asian "anchor" currency to which the other denominations would be tied in order to prevent destabilising swings on the global markets, he said.
"There is a need for an anchor," he said. "How this is to come about, I don't know. If it is the renminbi, fine, or if it is the yen, fine, or if it is a synthetic Asian currency unit, then so be it."
© Reuters 2004. All Rights Reserved.
reuters.com
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Separate news from the deputy Minister of China's Finance Ministry. He said due to this year insignificant trade surplus <US$10 billion, so there will be no major revalue of RMB.
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Other separate news from China, revalue against a basket currency is off the table because >90% of Chinese trade are denominated in US$, so exchange rate based on a basket currency will not solve the problem.
IMF suggested in May that China should widen the trading range and set its exchange rate based on a basket of currency. So China may take their 1st suggestion, but reject the 2nd (save them some face<g>) |
