* MARCH 7, 2010, 4:41 A.M. ET
Zhou Signals Yuan Policy Shift
By ANDREW BATSON and TERENCE POON
BEIJING--Central bank Gov. Zhou Xiaochuan said China will eventually move away from its current exchange-rate policies, which he described as a temporary response to the global financial crisis, but downplayed the idea that a move could come in the near future.
Mr. Zhou's comments Saturday at a press conference were the most direct suggestion to date by a Chinese official that the yuan's current de-facto peg to the dollar will not be maintained indefinitely. Previously, government officials have stressed currency stability without much qualification, and rejected foreign pressure to allow the yuan to strengthen.
Mr. Zhou said the current policy – which has kept the yuan's value basically unchanged against the dollar since July 2008 – was a "special measure" adopted in unusual circumstances. "This is a part of our package of policies for dealing with the global financial crisis," he said. "These kinds of policies sooner or later will be withdrawn."
Economists and currency-market participants increasingly expect that China will at some point this year allow its currency, which is formally known as the renminbi, to rise against the U.S. dollar. Inflation in China is picking up as the economy recovers, a problem many economists say a stronger currency could address.
Trade frictions are also on the rise. The currency peg has helped the country's exporters take advantage of the recent recovery in world trade, but has drawn increasing criticism from the U.S. and Europe as well as China's Asian neighbors. For those critical of Chinese currency policy, Mr. Zhou's indication that he is considering an exit from the peg was welcome.
"It is encouraging that Gov. Zhou's statement suggests that the move to a managed float of the renminbi will be resumed once the global recovery firms up," said Eswar Prasad, a professor at Cornell University who previously headed the International Monetary Fund's China desk. "Maintaining an undervalued exchange rate certainly benefits China, but at the expense of other countries that lose their relative competitiveness in foreign trade."
Mr. Zhou's remarks don't necessarily mean that a change in the currency is imminent. China's Ministry of Commerce has stressed the need to continue present policy, especially as the recovery in the export sector remains fragile. On Friday, Premier Wen Jiabao reaffirmed that China will continue to keep the yuan "basically stable" – though that language is vague enough to allow the leadership some flexibility. Mr. Zhou himself said prospects will depend on how the global economy evolves.
"If we are to withdraw from unconventional policies and return to conventional economic policies, we need to choose the time very carefully. This includes the exchange rate policy for the renminbi," Mr. Zhou said, using the Chinese currency's official name. "The G-20 Pittsburgh summit also particularly pointed out the need to avoid the premature withdrawal of stimulus policies."
In addition to assessing the uncertain global economic outlook, Beijing also has to decide the tricky issue of exactly how to lift the current peg to the dollar. A gradual strengthening of the yuan would be easier on exporters but would attract foreign funds seeking to profit from further appreciation. A one-off revaluation, on the other hand, could stem such inflows but would hit exporters hard.
The political climate abroad is becoming less and less receptive to such nuances. U.S. President Barack Obama told Democratic senators earlier this year that he will "get much tougher" with China on trade issues, including the currency. The U.S. Treasury in April also faces its annual decision on whether to formally label China a "currency manipulator," a move it has never yet taken.
Chinese officials have long bristled at outside criticism on the currency, and Mr. Zhou said he is opposed to what he called "politicizing" exchange-rate policy. But he indicated a willingness to address currency issues in the context of the Group of 20 nations' discussions on maintaining balanced global economic growth.
And Mr. Zhou emphasized that China's exchange-rate policies are not set in stone for the long term, since they need to adapt to changes over time in the structure of Chinese economy. "The exchange-rate mechanism and the price of the renminbi are in a dynamic process of continuous change," he said. "So they will differ in different periods."
—Liu Li contributed to this article.
Zhou Signals Yuan Policy Shift
By ANDREW BATSON and TERENCE POON
BEIJING--Central bank Gov. Zhou Xiaochuan said China will eventually move away from its current exchange-rate policies, which he described as a temporary response to the global financial crisis, but downplayed the idea that a move could come in the near future.
Mr. Zhou's comments Saturday at a press conference were the most direct suggestion to date by a Chinese official that the yuan's current de-facto peg to the dollar will not be maintained indefinitely. Previously, government officials have stressed currency stability without much qualification, and rejected foreign pressure to allow the yuan to strengthen.
Mr. Zhou said the current policy – which has kept the yuan's value basically unchanged against the dollar since July 2008 – was a "special measure" adopted in unusual circumstances. "This is a part of our package of policies for dealing with the global financial crisis," he said. "These kinds of policies sooner or later will be withdrawn."
Economists and currency-market participants increasingly expect that China will at some point this year allow its currency, which is formally known as the renminbi, to rise against the U.S. dollar. Inflation in China is picking up as the economy recovers, a problem many economists say a stronger currency could address.
Trade frictions are also on the rise. The currency peg has helped the country's exporters take advantage of the recent recovery in world trade, but has drawn increasing criticism from the U.S. and Europe as well as China's Asian neighbors. For those critical of Chinese currency policy, Mr. Zhou's indication that he is considering an exit from the peg was welcome.
"It is encouraging that Gov. Zhou's statement suggests that the move to a managed float of the renminbi will be resumed once the global recovery firms up," said Eswar Prasad, a professor at Cornell University who previously headed the International Monetary Fund's China desk. "Maintaining an undervalued exchange rate certainly benefits China, but at the expense of other countries that lose their relative competitiveness in foreign trade."
Mr. Zhou's remarks don't necessarily mean that a change in the currency is imminent. China's Ministry of Commerce has stressed the need to continue present policy, especially as the recovery in the export sector remains fragile. On Friday, Premier Wen Jiabao reaffirmed that China will continue to keep the yuan "basically stable" – though that language is vague enough to allow the leadership some flexibility. Mr. Zhou himself said prospects will depend on how the global economy evolves.
"If we are to withdraw from unconventional policies and return to conventional economic policies, we need to choose the time very carefully. This includes the exchange rate policy for the renminbi," Mr. Zhou said, using the Chinese currency's official name. "The G-20 Pittsburgh summit also particularly pointed out the need to avoid the premature withdrawal of stimulus policies."
In addition to assessing the uncertain global economic outlook, Beijing also has to decide the tricky issue of exactly how to lift the current peg to the dollar. A gradual strengthening of the yuan would be easier on exporters but would attract foreign funds seeking to profit from further appreciation. A one-off revaluation, on the other hand, could stem such inflows but would hit exporters hard.
The political climate abroad is becoming less and less receptive to such nuances. U.S. President Barack Obama told Democratic senators earlier this year that he will "get much tougher" with China on trade issues, including the currency. The U.S. Treasury in April also faces its annual decision on whether to formally label China a "currency manipulator," a move it has never yet taken.
Chinese officials have long bristled at outside criticism on the currency, and Mr. Zhou said he is opposed to what he called "politicizing" exchange-rate policy. But he indicated a willingness to address currency issues in the context of the Group of 20 nations' discussions on maintaining balanced global economic growth.
And Mr. Zhou emphasized that China's exchange-rate policies are not set in stone for the long term, since they need to adapt to changes over time in the structure of Chinese economy. "The exchange-rate mechanism and the price of the renminbi are in a dynamic process of continuous change," he said. "So they will differ in different periods."
—Liu Li contributed to this article.