China currency policy to remain on track

04/05/2010 | Sid Verma and Anthony Rowley

China’s policy of only gradually appreciating its currency is unlikely to be shifted by the global market volatility triggered by the Greek debt crisis, a senior IMF official has said

China’s policy of only gradually appreciating its currency is unlikely to be shifted by the global market volatility triggered by the Greek debt crisis, a senior IMF official has said.

Naoyuki Shinohara, deputy managing director of the IMF, told Emerging Markets: “The recent crisis in Greece is exceptional, and I don’t see any direct linkages between European sovereign debt burdens and the [decision to strengthen] the renminbi.”

He reiterated calls for the Asian giant to help correct global imbalances by strengthening its “undervalued exchange rate”.

In recent weeks, markets have expected an increase in the value of China’s currency and changes to the exchange rate regime, such as a one-off renminbi revaluation or a widening of the daily trading band.

Both moves would break the 22-month currency peg to the dollar and are expected before the US-China Strategic Economic Dialogue on May 24-25.

The Greek debt scare that preceded the $120 billion bail-out deal at the weekend sparked rumours that China would delay the move – but Shinohara said China’s economy could ride out global market storm.

This view was echoed by Li Daokui, a member of the People’s Bank of China (PBoC) monetary policy committee, who told Emerging Markets that “the need to boost domestic consumption deserves more attention than international concerns”.

Li said that 5% currency appreciation – as expected by some market players – would be “excessive”, disrupting exports from small and medium-sized Chinese companies and “abruptly increasing the cost for [domestic firms]” by piling on labour and other costs.

China is locked in a tug-of-war between those calling for stable monetary and exchange rate policies and pressure to rebalance the economy away from exports and adopt market-based reforms, principally in currency and capital account policy.

Asked if China could achieve its stated bid to make Shanghai a global financial centre by 2020, Shinohara of the IMF said that this would entail “liberalization of domestic markets and capital account transactions, and [at present] this is being done very slowly. They need to increase the pace of reforms.”

Shinohara also poured cold water on reports that China is pushing for its currency to be added by 2015 to the basket of currencies that comprise the IMF’s special drawing rights (SDRs).

“I see no particular push from the Chinese on this issue and for any currency to be included, it needs to be defined as currency that is traded in the global marketplace.”

Xie Xuren, the Chinese finance minister, in Tashkent yesterday repeated the government’s policy that maintaining a stable exchange rate has “contributed to global financial stability”.

Vice finance minister Li Yong, giving a briefing in Tashkent yesterday, sidestepped the issue of whether China might raise interest rates in addition to tightening banking reserve requirements. He said that Beijing will consider “every instrument” to “fine tune” demand.

Loan growth in China soared by an amount equal to 30% of GDP last year, putting “upward pressure on asset prices” such as real estate and stocks, Li acknowledged.

Related stories

  • CAF set to be first multilateral to open its doors to Cuba

    Cuba looks set to continue its reintegration into the global financial system if the Development Bank of Latin America becomes the first multilateral to incorporate the Caribbean country as a member.

  • 'No way North Korea' — DPRK refused entry to China-led AIIB

    Emerging Markets can reveal that North Korea was rebuffed by Beijing in its attempt to join the China-led Asian Infrastructure Investment Bank because it was unable to hand over a proper snapshot of the hermit state’s economy and finances

  • CUBA: after 50 years, the great thaw begins

    Cuba may be 90 miles off the US coast but for many it is a complete unknown. That hasn't stopped investors lining up to figure out how best to tap into a market isolated for more than 50 years

  • China's Argentina focus divides LatAm

    China, keen to see its influence grow in Latin America, will be hoping that Argentina turns out to be a better bet than Venezuela

  • Keep calm and carry on: LatAm set to ride out US rate hike

    Policymakers in Latin America have been braced for tighter US monetary policy for a couple of years, which has allowed them to cope with the impact of higher borrowing costs. One fly in the ointment for corporate borrowers could be a rise in the dollar against EM currencies.

Editor's Picks

  • OIL: Oiling up for a fall

    OIL: Oiling up for a fall

    In the 1966 film The Good, the Bad and the Ugly, it was the Mexican Tuco Ramirez playing the not-so-good looking one. The movie title is a neat way to categorise Latin American countries’ situation in the face of a plunge in oil prices, though half a century on Mexico’s role has changed.

In Focus

  1. AFRICA IN THE INTERNATIONAL BOND MARKETS: African sovereigns go mainstream as investors shift focus away from Russia

  2. KAZAKHSTAN: Kicking Kazakhstan back into gear - Nazarbayev tries again at transformation