China vows to adjust yuan band when time is ripe

Beijing, Aug 4 | Updated: Aug 5 2005, 05:30am hrs
China pledged on Thursday to follow up last months landmark revaluation of the yuan by adjusting the currencys new trading band when the time is right.

But the central bank, conceding no ground to critics who say the 2.1 percent revaluation did not go far enough, gave no hint when that change might occur and reiterated that it would keep the currency at what it called a reasonable and balanced level.

Senior officials from both Japan and Germany called on Thursday for China to let the yuan rise further.

Bundesbank Vice-President Juergen Stark called Beijings gradual approach to exchange rate reform appropriate but said the yuan would have to rise more to make a dent in Chinas big trade surplus.

Such comments are to be expected, but we dont believe China will revalue the yuan again at least for the next few weeks, as the central bank has made clear, said a dealer at a foreign bank.

The yuan , closed at 8.1027 per dollar, just shy of the post-revaluation peak of 8.1025 scaled on Wednesday.

Stark also expressed frustration that China had not given more details about the new system it has adopted to steer the currency.

When it revalued the yuan, the central bank dropped its 11-year-old peg against the dollar and adopted a managed float whereby the exchange rate would be guided with reference to a currency basket.

In doing so, the central bank said the yuan could rise or fall by 0.3 percent a day against the dollar but it allowed itself the same latitude before the revaluation and still kept the currency virtually fixed for more than 7 years.

Since the revaluation the yuan has moved a bit, but not nearly by 0.3 percent per day.

The central bank has promised to provide more information at some point about the float, but Thursdays monetary policy report for the second quarter did little more than repeat a promise made on July 21 that the band would be adjusted when necessary.

The Peoples Bank of China will, in accordance with the markets development and the economic and financial situation, adjust the exchange rates floating band at an appropriate time, the report said.

Whereas financial markets and policy makers are focusing on the yuans exchange rate, the central bank again put emphasis in the report on beefing up Chinas fledgling currency market.

We will speed up development of the forex market and all kinds of forex derivative products, quickly organise interbank forwards trading for forex, promote renminbi-foreign currency swaps and give customers more and better risk management tools, it said.

Trading volume in the domestic foreign exchange market totalled $146.1 billion in the first six months, an increase of 84.2 pct over the same period of 2004.

The yuans rise would lead to intensive pressure on exporters and some of them could face fairly significant difficulties, the bank said.

But it said it expected the overall trend of fundamentally strong growth to persist for the rest of the year. China has grown at an annual rate of 9.0 percent or more for the past 8 quarters.

Inflation has remained contained despite the brisk growth, with annual consumer price inflation falling to 1.6 percent in June. But the bank said inflationary pressures remained and forecast that, after a decline this quarter, consumer price inflation would pick up in the final three months of the year.

The bank stood by its projection that the broad M2 measure of money supply would grow about 15 percent this year but scaled back its estimate of credit growth.

It now expects new yuan lending of 2.3 trillion to 2.5 trillion yuan, compared with a forecast at the start of 2005 of 2.5 trillion.

Echoing other policy-makers worried by the economys reliance on exports, the bank said China aimed to expand domestic consumption, which has been growing at a slower rate than GDP.