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.

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