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China central bank to promote reform of Yuan exchange rate

China’s central bank said on Saturday it will promote further reform of its exchange rate mechanism, but maintained there is no basis for “large swings” in the currency.

Olivier Languepin

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Chinese currency Yuan official name Renminbi

China’s central bank said on Saturday it will promote further reform of its exchange rate mechanism, but maintained there is no basis for “large swings” in the currency.

Excerpt from:
China central bank to promote reform

The yuan’s under-valuation stands to lower European exports and increase imports from China as spending is redirected from European produced goods to cheaper Chinese goods. The resulting increased trade deficit will directly cost jobs, and reduced demand and profitability of European manufacturing companies will reduce investment spending. Furthermore, European manufacturers will have an incentive to close plants and shift production and new investment to China, just as happened in the US.

Chinese currency Yuan official name Renminbi

The People's Bank of China, China's central bank, has decided to proceed further with the reform of the Renminbi exchange rate regime to enhance the RMB exchange rate flexibility, a spokesperson of the central bank said Saturday.

China has granted Bangkok Bank PCL, Thailand’s largest commercial bank, an exclusive license to clear yuan transactions in the country. The move was part of China’s attempt to expand the role of its renminbi currency in Asia, Bangkok Bank senior executive vice president Prasong Uthaisangchai told The Nation newspaper. Hong Kong will become the first yuan-clearing centre for China. There are now several banks in Hong Kong that serve in this capacity, but in general, China wants to have only one bank in one market.

China has moved into a managed floating exchange rate regime based on market supply and demand with reference of a basket of currencies since July 1, 2005. The spokesperson said the reform of the RMB exchange rate regime has been making steady progress since 2005, producing the anticipated results and playing a positive role. With the current round of international financial crisis was at its worst, the exchange rate of a number of sovereign currencies to the U.S. dollar depreciated by varying margins.

“The stability of the RMB exchange rate has played an important role in mitigating the crisis’ impact, contributing significantly to Asian and global recovery, and demonstrating China’s efforts in promoting global rebalancing,”

the spokesperson said.

The gradual recovery of the global economy and upturn of the Chinese economy has become more solid with enhanced economic stability. It is desirable to proceed further with reform of the RMB exchange rate regime and increase the RMB exchange rate flexibility, said the spokesperson.

The Thai baht has appreciated, but only to the extent of other regional exchange rates. The baht has appreciated 4.9 percent in 2009, compared for example to over 30 percent of the Brazilian real.

The International Monetary Fund’s chief Dominique Strauss-Kahn on Saturday welcomed China’s decision to further reform its exchange rate mechanism and said that the move will benefit Chinese consumers.

China’s announcement is “a very welcomed development,” Strauss-Kahn said in a statement.

The move will help increase Chinese household income and provide the incentives necessary to reorient investment toward industries that serve the Chinese consumer,”

he said.

Key risks to the outlook are political uncertainty and the timing of the withdrawal of fiscal and monetary stimulus. Increased political tensions may have a long-lasting impact on investment, and withdrawal of stimulus (in Thailand and the advanced economies) must be precisely timed to avoid macroeconomic imbalances (including new asset bubbles) while also ensuring that the recovery is on a sufficiently solid footing.

Shipments to emerging East Asia already surpassed the 2008 peak level but those to EU, Japan and ASEAN are slow.

The key risk to the global recovery lies in the need to get the timing of withdrawing fiscal and monetary stimulus just right. Withdrawal of fiscal stimulus too early may lead to another negative demand shock and a negative expectations spiral, whereas withdrawing the stimulus too late may lead to high inflation, further weakening of the US dollar, and possible asset price bubbles. In Thailand, for example, more than ten years since the 1997/1998 financial crisis banks still have bad loans in their books and the government still holds a large amount of debt related to the recapitalization of financial institutions. Given the expected length of recovery, it is important not to withdraw stimulus programs too soon, before the recovery is on a firm footing. On the other hand, macroeconomic imbalances are accumulating and eventually fiscal and monetary authorities, especially in the US, must consolidate their fiscal position and withdraw liquidity.

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