China's central bank chief resists currency revaluation pressure

09/10/2010 | Anthony Rowley and Taimur Ahmad

Controversy over the renminbi exchange rate should “fade away” over time, People’s Bank of China governor Zhou Xiaochuan said last night, implying that Beijing does not plan any dramatic initiatives to appreciate the currency

He spoke after China allowed its currency to rise yesterday to its highest level against the dollar since a revaluation in July 2005 – a move which traders saw as aimed at defusing tension over the currency.

Zhou indicated meanwhile to Emerging Markets that the problem of misaligned exchange rates lies as much with the depreciation of the dollar as with the exchange rates of the renminbi and other emerging market currencies.

When challenged on this point, US authorities claim that they believe in a “strong dollar”. But the depreciation of the dollar has led to the effective appreciation of other currencies, such as China’s, he said.

The intensive controversy over the renminbi exchange rate should recede with time, Zhou told a small briefing yesterday. “We think that this issue may gradually fade out along with the recovery.

“If the US economy gradually recovers and job creation increases, global imbalances will reduce”, he argued.

“We have a package of measures to encourage internal demand in China including investment in rural areas”, Zhou said. This should help the Chinese economy shift more toward greater reliance on domestic demand and less on exports, he suggested.

As the balance of demand changes, China’s current account surplus with the US should “go down to a reasonable level”, Zhou said. He argued that a broader approach is needed to imbalance problems than focusing only on exchange rates.

Zhou said that China had already made a “contribution” to solving global imbalances, by keeping its exchange rate stable while other emerging economies had depreciated their currency after the global currency crisis, in order to remain competitive.

Asked whether Beijing would consider adopting voluntary export restraints as a way to reduce its current account surplus with the US, as Japan did in the 1980s, Zhou said this idea had been broached by “a small group of economists” in China.

If trade friction with the US rose to a level where it became necessary to take measures to reduce the bilateral imbalance, voluntary export restrains could be one option, said Zhou. “But the idea is not being seriously studied” in China, he added.

He urged that the exchange rate issue should be seen in a broad context, bearing in mind that China runs deficits with some countries and surpluses with others. Demand imbalances are part of a wider phenomenon requiring policy actions beyond exchange rate adjustment.

Earlier, Zhou argued during a BBC World debate that China has already embarked upon exchange rate reform. “We are doing adjustment in a gradualist way”, he said.

“There are some months when our current account is in surplus and some when it is deficit,” he said. “We will observe the movement of the balance of payments, and then decide what to do.”

The renminbi exchange rate is already “supply and demand related”, Zhou argued. But he acknowledged that China needs to “continue with exchange rate reform. [But] a package of policies is necessary.”

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