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China govt economist says Q2 trends point to yuan move

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China govt economist says Q2 trends point to yuan move
27 Apr 2010, 1040 hrs IST,REUTERS

BEIJING: China will have to resume movement of its yuan exchange rate to manage a convergence of strong economic growth, exports and inflationary pressure in the second quarter, a senior government economist has said.

In an interview published on Tuesday, Ba Shusong of the State Council Development Research Centre, which advises the Chinese government cabinet, told the China Economic Times that policy makers should focus more on "making the exchange rate formation mechanism more flexible and marketised."

Beijing has effectively pegged the yuan at about 6.83 to the dollar since mid-2008, after three years of gradual appreciation, in an effort to protect its exporters from the global financial crisis. The US and other economies have complained that the yuan is being held below the rate an unfettered market would set.

Ba told the Chinese-language newspaper that the peg helped shore up exports, but building domestic economic pressures meant yuan reform should resume. He did not say when that would happen but stressed the importance of the outlook in the second quarter. "Looking at economic growth forecasts for the second quarter, it's expected that exports will jump sharply in the second quarter, economic growth in the first quarter was also very strong, and price-rise pressures are quite large," Ba said. "Therefore, it will be necessary to resume reforming the renminbi exchange rate mechanism." The renminbi is another name for the yuan.

Chinese consumer prices rose 2.4 per cent in the year to March, outstripping the 2.25 per cent rate on one-year certificates of deposit.

Ba does not speak for the Chinese government, which has struck a much more careful tone about the yuan. But the call from him and other Chinese think-tank economists to relax the yuan peg against the dollar underscores that there is a constituency in China for faster policy moves.

Keeping the yuan tightly tethered to the dollar had helped to shore up Chinese exports and also to bolster the stability of the dollar, Ba said. He said resumed reform of the yuan exchange rate should focus on getting the policy settings right rather than seeking to guess the exactly appropriate value of the yuan -- a nigh impossible task, he added.

"Let the forces of supply and demand operate more and more freely in (foreign exchange) market transactions, so that those transactions arrive at a relatively reasonable exchange rate", Ba told the newspaper, which is published by the State Council Development Research Center.

Beijing also faces rising international demands, especially from Washington, to lift the value of the yuan, making China's exports relatively more expensive and opening up greater demand in China for imported goods.

A top US lawmaker said in Washington on Monday that China needs to raise the value of the yuan by a "significant" amount or the US would take action.

Ba said China should determine yuan policy based on its own economic interests, but should also rid itself of what he called "long-accumulated (yuan) float phobia." Loosening controls on the yuan would help to control inflation, which Ba said were increasingly difficult to juggle with managing China's growing pile of foreign exchange reserves.

China's foreign exchange reserves, the world's largest, rose by $47.9 billion in the first quarter to $2.4471 trillion. Policy-makers should also "send a clear signal" to stifle money flows that could upset the steady advance of exchange rate reforms, he added.

China could revert to the pre-crisis mode of allowing the yuan to strength gradually against the dollar, a central bank adviser said in a weekend interview with a television station in Hubei, a central Chinese province. "I don't oppose a gradual appreciation process in a floating and managed manner," said Xia Bin, one of the three academic members with the monetary policy committee and a also senior researcher with the State Council Development Research Centre. He said China does not have to change the "managed floating exchange rate" regime.

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