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Beijing will hold the
peg
BEIJING - The
government will not allow the yuan (also known as
the Renminbi) to appreciate this year as the
market is highly speculative on the revaluation of
the currency, according to Fan Gang, director of
the National Economic Research Institute China
Reform Foundation.
If Beijing allows the
yuan to appreciate in such a market environment,
the exchange rate of the currency will see even
greater fluctuation, Fan said on Sunday at a
seminar on economic outlook held by MasterCard
International in Hong Kong. Meanwhile, Fan
stressed that yuan revaluation must take place an
at appropriate time because it is a very sensitive
issue, which could bring about unemployment shocks
that would be very hard to deal with on the
mainland.
Fan said that speculation on
yuan revaluation is very risky and dangerous, and
as long as the speculative money stays in the
market, the central government will not consider
any revaluation. Fan also noted that 5% inflation
for the mainland last year and an expected 4-5%
inflation this year, or a total of about 10%
increase in consumer prices, would have actually
led to the appreciation of the yuan.
The
rise of interest rates in the United States this
year will also ease the appreciation pressure on
the yuan, Fan added. In the long run, the yoan
should be pegged to a basket of currencies because
the exchange rate of the US dollar is very
unstable, he suggested.
Yuwa Hedrick Wong,
MasterCard's economic adviser for the Asia-Pacific
region, estimated that the economy of the mainland
would remain active this year and drive economic
growth in the region. Wong said that because of
the complexity of variables in the Asia-Pacific
region as well as in the whole world, the global
economy would meet new uncertainties and
complexities, such as greater fluctuation of the
US dollar, continuous inflation and consequent
rise of interest rates.
Wong believes that
the dollar will see greater fluctuation this year,
with a range of 10-20%, and the mainland
government will keep raising interest rates.
Furthermore, MasterCard International suggested
that as consumer confidence and employment in Hong
Kong improves, the stock and property markets
rebound, and deflation comes to an end,
development in Hong Kong should remain optimistic.
At the same time, the inflow of mainland tourists
and capital will drive Hong Kong's economic growth
in 2005.
Forex reserves
surge
China's foreign exchange reserves hit
a record $609.9 billion in 2004, soaring at an
alarming rate of $206.7 billion over 2003,
according to the People's Bank of China. Starting
out with $145 billion in early 1999, the foreign
exchange reserves increased month by month to
reach $165.574 billion by the end of 2000, up to
$212.165 billion by the end of 2001, up again to
$286.407 billion by the end of 2002 and nearly
doubled to $403.251 billion by the end of 2003.
Over the last two years, the amount of
foreign exchange reserves almost climbed a new
height every day, especially in 2004 when the
reserves grew at a daily rate of $566 million. The
hectic growth may well be attributed to the
accumulation of favorable foreign trade. But
things were not so simple in 2004, when China
suffered a deficit in the first four months, thus
reducing the surplus in the current account while
the surplus in the capital account was much bigger
than before.
Statistics show that the
seven months in the first three quarters witnessed
a monthly increase of more than $10 billion but
the last quarter witnessed a shot-up of $95.4
billion, averaging $30 billion a month. Of this
additional amount, $27.905 billion were attributed
to October, $31.439 billion to November and
$36.018 billion to December.
The
unconventional growth in the last three months
explained the hectic growth in the whole year. The
trade surplus has indeed grown, but most
economists hold that the influx of speculative
capital into China, forcing the central bank to
settle accounts, is the true factor behind the
unconventional growth of foreign exchange reserves
instead of trade surplus.
It is commonly
recognized that the interest rate increase in the
first two months increased the anticipation of
evaluation of the yuan and the speculative capital
converged in China through all possible avenues.
But the exchange rate of yuan was stabilized at
8.2765 yuan to the dollar, to the disappointment
of speculative capital, which raked in nothing at
all.
Though an expression of stronger
national strength, the huge amount of foreign
exchange reserves has occupied more and more base
currency, thus coming into conflict with the
objects of curtailing inflation and stabilizing
prices. It also brought about a big challenge to
the monetary policy. The central bank had to issue
a large amount of bills to offset the amount of
base currency occupied.
The daily issue of
bills by the central bank chalked up a new record
with the start of the new year. By January 11, the
bank issued 90 billion yuan of bills,
strengthening the currency withdrawal. All the
moves were aimed at reducing the pressure on
currency occupation. Though the People's Bank has
adopted many positive measures to restrict the
inflow of foreign exchange and relax control over
outbound foreign reserves, the current situation
shows that foreign exchange reserves will continue
to increase for some time to come. It will become
a problem that will have to be dealt with
seriously in 2005.
The departments
concerned are bracing for the battle ahead. The
People's Bank of China has included in its 2005
work schedule the task of stimulating the creation
of a yuan exchange rate formation mechanism and
stabilizing it at a reasonable and a balanced
level. Besides, the Chinese government will
establish a market mechanism and management system
for regulating international payments, striving to
bring them into balance and improving the foreign
exchange surrender and settlement system.
(Asia Pulse/XIC) |
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