Published April 12, 2010
China urged to target currency basket
(BOAO, China) China should change the way it manages the yuan and target a basket of currencies instead of the US dollar, according to a recent adviser to the central bank.
Mr Fan: Argues for a gradual rise in the yuan, not an abrupt revaluation
The comments by Fan Gang, head of the National Economic Research Institute think-tank, add weight to speculation that China is preparing a shift in its exchange rate regime after 21 months of keeping the yuan pegged to the US dollar.
US Treasury Secretary Timothy Geithner paid a hastily arranged visit to Beijing on Thursday, fanning talk that a deal was in the works to unshackle the yuan.
'Pressures from both international politicians and market forces are coming up, and the Chinese economy is recovering. All that may make things move in that direction,' Mr Fan told Reuters Insider TV at the weekend during the Boao Forum for Asia on the southern island of Hainan.
Mr Fan recently stepped down after four years as a member of the monetary policy committee of the People's Bank of China.
When China revalued the yuan by 2.1 per cent in July 2005, it steered the currency with reference to a basket of currencies.
In practice, China adopted a crawling peg against the US dollar, allowing the yuan to rise a further 19 per cent before it effectively froze the rate near 6.83 per US dollar in July 2008 to help its exporters ride out the global credit crunch.
Mr Fan said targeting the US dollar had become difficult to deal with because of the US currency's volatility. 'I'd like to say maybe it's time for China to switch to a real basket - not a basket reference system, but a basket target system,' he said.
Some US lawmakers and think-tanks contend the yuan is as much as 30-40 per cent undervalued. But Mr Fan said a one-off adjustment of that magnitude would kill the economy. He argued for a gradual rise in the yuan, not a large, abrupt revaluation. 'I really believe China still needs to follow a so-called managed floating approach,' he said.
A completely free float would require the full convertibility of the yuan and liberalisation of the capital markets. Chinese firms would also have to be sophisticated in hedging currency risk, Mr Fan added.
In deciding what to do with the yuan, China must weigh not only external pressure but also domestic considerations, including high unemployment and the conflicting opinions of various ministries.
The Ministry of Commerce, as a staunch defender of exporters, is at odds with the central bank, which would like a firmer currency to dampen inflation.
The ministry said on Saturday that China's US$7.24 billion trade deficit in March, the first in six years, showed that the yuan's exchange rate was not decisive in determining flows of goods. -- Reuters
China urged to target currency basket
(BOAO, China) China should change the way it manages the yuan and target a basket of currencies instead of the US dollar, according to a recent adviser to the central bank.
Mr Fan: Argues for a gradual rise in the yuan, not an abrupt revaluation
The comments by Fan Gang, head of the National Economic Research Institute think-tank, add weight to speculation that China is preparing a shift in its exchange rate regime after 21 months of keeping the yuan pegged to the US dollar.
US Treasury Secretary Timothy Geithner paid a hastily arranged visit to Beijing on Thursday, fanning talk that a deal was in the works to unshackle the yuan.
'Pressures from both international politicians and market forces are coming up, and the Chinese economy is recovering. All that may make things move in that direction,' Mr Fan told Reuters Insider TV at the weekend during the Boao Forum for Asia on the southern island of Hainan.
Mr Fan recently stepped down after four years as a member of the monetary policy committee of the People's Bank of China.
When China revalued the yuan by 2.1 per cent in July 2005, it steered the currency with reference to a basket of currencies.
In practice, China adopted a crawling peg against the US dollar, allowing the yuan to rise a further 19 per cent before it effectively froze the rate near 6.83 per US dollar in July 2008 to help its exporters ride out the global credit crunch.
Mr Fan said targeting the US dollar had become difficult to deal with because of the US currency's volatility. 'I'd like to say maybe it's time for China to switch to a real basket - not a basket reference system, but a basket target system,' he said.
Some US lawmakers and think-tanks contend the yuan is as much as 30-40 per cent undervalued. But Mr Fan said a one-off adjustment of that magnitude would kill the economy. He argued for a gradual rise in the yuan, not a large, abrupt revaluation. 'I really believe China still needs to follow a so-called managed floating approach,' he said.
A completely free float would require the full convertibility of the yuan and liberalisation of the capital markets. Chinese firms would also have to be sophisticated in hedging currency risk, Mr Fan added.
In deciding what to do with the yuan, China must weigh not only external pressure but also domestic considerations, including high unemployment and the conflicting opinions of various ministries.
The Ministry of Commerce, as a staunch defender of exporters, is at odds with the central bank, which would like a firmer currency to dampen inflation.
The ministry said on Saturday that China's US$7.24 billion trade deficit in March, the first in six years, showed that the yuan's exchange rate was not decisive in determining flows of goods. -- Reuters