Conditions ripe for China to widen yuan band: report


'Experts have reached a consensus that the market environment and policy environment for 'fine-tuning' the yuan exchange rate are basically mature,' the newspaper said.

'A complete float is unlikely in the near term, but a gradual widening of its floating band to return to the pre-1998 'managed float' that is based on supply and demand may happen any time.'

Beijing has pledged to move towards a flexible currency regime, but senior officials have cited the need to make further progress in financial reforms.

But the newspaper said: 'As for the timing of the exchange rate reforms, experts believe they will come when people are paying less attention as the monetary authorities worry that any move to boost currency flexibility may be misread as a signal of a revaluation.' Chinese officials insist they will not embark on currency reforms as long as speculation over the yuan remains at fever pitch.

'Currently, our country is paying a growing price for maintaining the exchange rate,' the newspaper said noting that foreign exchange reserves are climbing up rapidly.

Those reserves, the world's second-biggest after Japan, soared more than US$200 billion last year to nearly US$610 billion, driven by strong foreign investment, a trade surplus and speculative money betting on a possible revaluation.

Because of the dollar peg, the central bank has to buy foreign currency entering the country by issuing more yuan. To counter the inflationary effects of a bigger money supply, it issues bills to mop up liquidity.

The central bank drained a net 529 billion yuan (S$105 billion) from the banking system through open market operations in 2004 - almost double the amount it soaked up in 2003.

Commercial banks, main buyers of the central bank bills, could face risks if interest rates rise, the newspaper said.
While a complete float of the yuan is unlikely in the near term, a gradual widening of its floating band may happen any time, a state newspaper said yesterday.

In comments just hours before senior Chinese officials were to meet G-7 finance ministers in London, the China Securities Journal said this would return the currency regime to the pre-1998 'managed float' based on supply and demand.

Meanwhile reports from London say prospects for a new global accord on currency management appeared even more remote after US Treasury Secretary John Snow called in sick on Thursday.

Officials have said that the G-7 finance ministers and central bank chiefs are likely to repeat a year-old appeal for less volatile currency markets and more flexible exchange rate regimes.

But no major new initiatives are expected to be announced to help achieve these goals. With Mr Snow unable to attend with a cold, the chances of any breakthrough seem even less likely. - Reuters, Bloomberg

Conditions ripe for China to widen yuan band: report - February 5, 2005