China currency shift 'no cure'

BEIJING - Last week's 2.1 per cent revaluation of the yuan and an accompanying shift to a managed float buy time for China but cannot by themselves iron out the economy's imbalances, a member of the central bank's monetary policy committee says.

Yu Yongding said yesterday in the China Securities Journal: "In the short term, pressure for yuan appreciation will increase further. The change to the currency regime and the small appreciation of the yuan cannot solve China's economic imbalances and the problems of the economy."

Yu said gradual, controlled appreciation of the yuan in tight ranges could win time for the Chinese economy to adjust. International financial markets would definitely bet that the 2.1 per cent revaluation would not be the end of the currency's appreciation.

But the system of a managed float that China had adopted would allow it to contain speculative forces and reduce excessive fluctuations in the exchange rate.

Yu said because China had capital controls and other policy tools at its disposal, the authorities could limit the impact of any "attack" on the economy stemming from currency appreciation and market expectations of a further strengthening.

In order to avoid continued market pressure for the yuan to crawl higher, the central bank would pursue its role as market participant in perfecting the process of exchange rate formation.

Last Thursday, China scrapped the yuan's decade-long peg to the US dollar. Its value will now be managed with reference to a basket of currencies and it will be allowed to move by as much as 0.3 per cent against the US dollar.

- REUTERS