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Beijing could resume managed float of currency, says adviser

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Published March 27, 2010

Beijing could resume managed float of currency, says adviser

CHINA could adopt a more flexible exchange rate policy once the global economy is back on a sure footing, a central bank adviser said yesterday, as pressure intensifies on Beijing to let the yuan rise.

In an opinion piece titled 'Toying with yuan won't help US', Fan Gang warned that a revaluation of the currency would not by itself resolve economic problems in the US, such as high unemployment and a massive trade deficit.

Mr Fan, the only academic member of the People's Bank of China's monetary policy committee, also pointed out that Beijing has domestic factors to consider, such as the need to create jobs in the world's number three economy.

'China may resume a managed float of its exchange rate, particularly if the uncertainty of the overall post-crisis economic situation diminishes,' Mr Fan wrote in a commentary in the English-language China Daily.

'In choosing whether or not to do so, its policymakers may weigh factors ranging from China's international responsibilities to the potential damage of foreign protectionism or even a trade war.

'What is certain, however, is that China's politicians have a domestic agenda just like the Americans. The key element of that agenda is to maintain employment growth,' wrote Mr Fan, who is also an economics professor at Beijing University and director of China's National Economic Research Institute.

The China Daily newspaper targets foreign readers and is sometimes used by the Communist leadership when it wants to send a message to the West.

Mr Fan's remarks come as international pressure grows on China to let the yuan - effectively pegged at about 6.8 to the US dollar since mid-2008 - appreciate.

Critics of the policy say that the currency is undervalued by as much as 40 per cent against the US dollar, giving Chinese exporters an unfair advantage.

The growing clamour over the yuan has highlighted differences within China on exchange rate policy.

While the central bank has signalled a more flexible exchange rate could be in the offing, the commerce ministry has been strident in its defence of the current policy.

Central bank governor Zhou Xiaochuan said early this month that the policy was temporary and would be removed 'sooner or later' along with other stimulus measures put in place when the global crisis erupted.

But on Wednesday, during a visit to Washington, Vice-Commerce Minister Zhong Shan rejected US lawmakers' demands for a review of the yuan regime.

US lawmakers on both sides of the political aisle have blamed the allegedly undervalued yuan for the burgeoning trade deficit with China, which soared to nearly US$227 billion in 2009.

They have introduced legislation to punish China with trade sanctions and asked US Treasury Secretary Timothy Geithner to label Beijing a 'currency manipulator' in a report due in April that could trigger tougher action.

While Mr Fan acknowledged that most economists believed the yuan was too low, he warned that a sudden adjustment could hurt Chinese exporters and increase inflationary pressures in the US.

'New difficulties in the US and China . . . would have a negative impact on global investor confidence, hurting US employment even further,' he said.

Mr Fan accused US lawmakers of using China's yuan policy as a 'scapegoat' for their country's economic woes and urged both nations to take steps to address the imbalances in their trade relationship.

'Only when both sides make serious efforts to fix their domestic fundamentals will the imbalances be reduced in a serious and sustained way,' Mr Fan said.

'Short-run exchange rate adjustments cannot simply fix negative long-term trends.'

In another development, China's foreign minister warned against protectionism without mentioning the US yesterday as trade tensions between two of the world's biggest economies remain high.

'The business ties among countries today are so close that if any country attempts to resort to the old practice of protectionism, and erect trade barriers, it can only end up hurting the interests of not only others, but also its own,' Yang Jiechi said in a speech in Beijing.

The Obama administration is under increasing pressure from some in Congress and the business community to declare Beijing a currency manipulator in the report due out in April. That could set the stage for a complaint to the World Trade Organization and possible sanctions on Chinese goods.

The US is expected to make the currency issue a priority when US Secretary of State Hillary Rodham Clinton and Mr Geithner lead the US delegation to the latest version of the twice-yearly Strategic and Economic Dialogue in China in late May.

Mr Yang yesterday noted the tensions. 'The overall trading environment is more complicated, the protectionist sentiments are on the rise,' he said.

He urged cooperation among countries, including on the unresolved nuclear issues in North Korea and Iran, without mentioning specifics. -- AFP, AP


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