China remains reluctant to float its domestic currency: IMF

08/11/2004 | ISI Intellinews

The IMF report prepared in July, but released last weekend said that China remains reluctant to float its domestic currency. (To see the full report please click on the "Asia" section and view "features")

The IMF report prepared in July, but released last weekend said that China remains reluctant to float its domestic currency. The report says that China feared that floatation of its domestic currency could lead to increased capital outflow, while a substantial change in the value of Yuan could result in increased unemployment.

IMF has suggested that China should increase the flexibility of the domestic currency by floating the Yuan in a wide range band linked to a currency basket. This would help the country achieve a soft landing of its economy. Since 1995, China has pegged its domestic currency at CNY 8.3 per US dollar, which is widely believed to favour Chinese products, as they remain cheaper and competitive in the global markets.

The Chinese central bank responded to the IMF's suggestion saying that that the country plans to create a more flexible exchange-rate mechanism. The reforms would be carried out gradually, said the central bank without mentioning a timetable. The IMF said yesterday that a more flexible currency would help China achieve a gradual economic slowdown.

According to the report on the country's economic review, China is progressing towards the desired economic soft landing. The anticipated soft landing is on account of macroeconomic control measures taken by the government aimed at slowing down the excessive investment growth in certain overheated sectors of the economy during the last 10 months.

Data compiled by the National Bureau of Statistics (NBS) indicates that during the first nine months of this year, excessive investment growth has been curtailed, while the economy grew 9.5% y/y. State Development and Reform CommissionÕs Director of Economic Operations, Wang Xiaoguang, said that growth rate of investment in fixed assets in urban areas decelerated to 30.3% during Jan-Aug from 53% growth witnessed in the first two months of the year. State Council's Deputy Director, Xie Fuzhan, said that the economic indicators point that the government's efforts to cool down economic growth have been effective, as it has resulted in stable growth.

NBS Director Li Deshui said the China's economic growth has witnessed a slowdown while inflation remain in the manageable range of 4.1% for the first nine months of this year. Other economic indicators also show progress. The urban unemployment rate declined to 4.2% as at end September, while trade surplus stood at USD 3.9bn for the first nine months of this year. FDI during the same period stood at USD 48.7bn, while forex reserves stood at USD 514.5bn as at end September. The government accepted that there are certain issues, which need to be tackled. The fixed-asset investment still remains a cause for concern.

The central bank Governor Zhou Xiaochuan, said that China's macroeconomic controls have achieved good results, however inflationary and investment pressures do exist. With a view to achieve a balanced economic development, the macroeconomic control measures would continue, as emphasised by Premier Wen Jiabao.

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