China to maintain stable yuan

China will maintain a basically stable Chinese yuan as it "perfects" the nation's foreign exchange rate mechanism, the People's Bank of China has said.

    Beijing is moving ahead with interest rate liberalisation

    The bank's monetary policy committee on Wednesday also said it would maintain "basically stable" interest rates as it moves forward with interest rate liberalization.

      

    The committee, chaired by bank governor Zhu Xiaochuan made the remarks after it held its third-quarter monetary policy meeting.

      

    "In accordance with the domestic and international economic situation, we must maintain the basic stability of interest rates and carefully push forward the market-oriented reform of interest rates," the bank said.

     

    Balance of payments

      

    We must "maintain the basic stability of the yuan exchange rate and perfect the exchange mechanism while encouraging the balance of international payments."

     

    The bank also addressed a 21% rise in the money supply in August that has come with expanding bank credit, and urged all commercial banks to reduce risks in loan operations and perfect their lending structure and management.

      

    "Although some new trends in the operation of the economy have appeared in the present term these need to be monitored more closely as credit has increased rather quickly,” the bank said.

      

    "The overly fast growth of credit can lead to long-term low-level economic growth, add to contradictions in the economic and financial structure and influence healthy and sustainable economic development," it said.

     

    "We must maintain the basic stability of interest rates and carefully push forward the market-oriented reform of interest rates"

    People's Bank of China

    China has come under increasing pressure, especially by the United States, to revalue the Chinese yuan, which is pegged to the US dollar at about 8.28 yuan to the dollar. 

     

     

    The bank, which promised US Treasury Secretary John Snow two weeks ago that it was committed to loosening its tight peg of the yuan to the US dollar, cited a growing money supply and fast paced credit expansion as a need to maintain monetary stability.

     

    The US has demanded Beijing should revalue the yuan, which it says is hurting US manufacturing and making US exports to China less attractive, but a growing chorus of international bankers and economists have come out in support of Beijing's policy.

     

    Fragile state

      

    "It is the wrong time (to float the currency)," David Eldon, chairman of Hongkong and Shanghai Banking Corp (HSBC), said at the 2003 Forbes Global CEO Conference in Shanghai.

      

    Commenting on the focal point of the ongoing controversy - the 8.28 yuan peg to one US dollar - Eldon urged caution and called attention to the still fragile state of the global capital markets, following the economic downturn of the past three years.

      

    Many economists and particularly US trade groups argue the yuan is grossly undervalued and as a result Chinese exports are unfairly competitive.

      

    Jospeh Stiglitz, the former chief economist and senior vice president of the World Bank, told the conference any move to revalue the currency now was "misguided".

      

    Floating the yuan would expose it to the global capital markets, whose volatility "would impose enormous costs on the Chinese economy," he said.

      

    Worse still, any float of the yuan "would also cause damage to the global economy."

      

    Pressure from the US on China to float its currency was a by-product of Washington's fiscal and trade deficits, and was not Beijing's concern, he added.

      

    "It is an American problem, not a Chinese problem,"  said Stiglitz, now professor of economics and finance at Columbia University in New York.

    SOURCE: AFP


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