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China ready to end Dollar Peg!
China ready to end dollar peg
The head of China’s central bank has given the strongest signal yet that the
country will move away from pegging its currency to the dollar, but he said
any changes would be gradual.
By Garry White
Published: 5:31PM GMT 06 Mar 2010
At the annual session of the legislative National People’s Congress in
Beijing, Zhou Xiaochuan, governor of the People’s Bank of China, said that
the days of the “special yuan” policy were numbered. He described the dollar
peg as a “temporary” response to the global financial crisis, but gave no
timescale for any change in policy. The currency has been pegged at about
6.83 yuan per dollar since July 2008.
Many economists expect China to allow the yuan to appreciate slightly this
year, but the cautious tone by Mr Zhou means that any change may not happen
for some time. He said that the central bank would maintain the “basic
stability” of the currency. So, despite the fact that the Chinese economy
grew by 10.7pc in the fourth quarter of last year, the country’s loose
monetary policy looks set to continue.
“If we are to exit from irregular policies and return to ordinary economic
policies, we must be extremely prudent about our choice of timing,” Mr Zhou
said. “This also includes the [yuan] exchange rate policy.”
China’s currency policy has been subject of fierce debate, particularly in the
US and Europe, with the country’s central bank accused of keeping the yuan
artificially low to promote a domestic exports boom. An artificially lower
currency makes the country’s goods and services more competitive, leaving
other exporters at a disadvantage. Jim O’Neil, Goldman Sach’s chief
economist, thinks the Chinese should allow their currency to appreciate by
as much as 5pc.
In recent week President Obama has been vocal on the issue of the artificially
low currency. “China and its currency policies are impeding the rebalancing
[of the global economy] that’s necessary,” Mr Obama told Bloomberg last
month. “My goal over the course of the next year is for China to recognize
that it is also in their interest to allow their currency to appreciate
because, frankly, they have got a potentially overheating economy.”
The relative value of the dollar is important to China, as the country is the
world’s largest holder of US government debt. According to data form the US
Treasury Department, China held $894.8bn (£591bn) of US Treasury securities
at the end of December. Roughly two-thirds of the country’s reserves are
believed to be in dollars and dollar-denominated assets such as gold.
“The US dollar is still an extremely important currency, playing a key role in
international trade, cross-border capital flows, direct investment as well
as in determining whether we can smoothly overcome the global financial
crisis,” Mr Zhou said.
When China eventually abandons the peg, the country will have to manage its
exit strategy carefully. If the central bank allows a gradual appreciation
of its currency, which would be the best strategy for its exporters, there
could be an inflow of funds from speculators betting on further
appreciation. However, a one-off revaluation could deal a severe blow to the
country’s manufacturing sector.