US backs China over currency reform

John Snow, the US Treasury Secretary, yesterday praised China for adopting the "right course" on currency reform as Beijing announced plans to abolish part of its foreign exchange quota regime.

Mr Snow defended the administration's decision last year not to formally cite China as a currency manipulator, saying US pressure on Beijing had been effective.

He said Chinese policymakers recognised that further revaluation was in their national interest: "They are putting in place mechanisms to allow their currency to have greater flexibility... I think we're on the right course."

After two years of pressure from the US and other G7 members, China revalued the yuan by 2.1 per cent and replaced its decade-old peg to the dollar with a trading band.

On Wednesday it allowed 13 banks to set the range, theoretically allowing the yuan to rise on a daily basis.

The State Administration of Foreign Exchange (Safe) said yesterday it would abolish foreign exchange quota limits for outbound investment.

The move could help offset capital inflows and ease upward pressure on the yuan.

Analysts said plans to get rid of the foreign exchange quotas could be a boon for Chinese firms keen on investing overseas and could help offset capital inflows and upward pressure on the yuan in the long term.

"A lot of people who are not investing in foreign countries on FDI projects would like to use this channel to convert the money," Jun Ma, at Deutsche Bank, said.

"It could be one item in this package to reduce pressure on yuan appreciation but it may not be the most important one."

Safe indicated it would look at ways of putting its $769bn of reserves to better use.

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