Yuan will be revalued - but not now

PUBLISHED : Sunday, 03 October, 2004, 12:00am
UPDATED : Sunday, 03 October, 2004, 12:00am

The mainland's central bank chief, Zhou Xiaochuan , yesterday defended Beijing's decision not to revalue the yuan and said an interest-rate increase now would be inappropriate.

In his most detailed account of the mainland's economic and exchange-rate policies over recent months, Mr Zhou made it clear Beijing was committed to exchange-rate reforms and overhauling the banking and finance sectors.

He said that although the mainland was not used to the concept of announcing a timetable for reforms, it would be foolhardy to dismiss Beijing's commitment.

'Chinese people are not used to the idea of setting a timetable when they make a commitment,' Mr Zhou was quoted as saying by the China News Service. 'But China has demonstrated time and again that it has the courage and determination to make reforms.'

Mr Zhou is in Washington with Finance Minister Jin Renqing at the invitation of the Group of Seven major industrialised nations (G7).

On Friday, they met G7 finance chiefs and exchanged views on the challenges for the yuan, the world economy and oil prices.

Analysts regarded the invitation as the first step toward Beijing's inclusion in the group, reflecting the mainland's increasing clout in the global economy.

In an interview published by Xinhua last night, Mr Zhou explained that the central bank believed now was not the time to raise interest rates or relax measures such as lending curbs imposed on the economy since late last year.

He said the macroeconomic control measures were needed because the investment frenzy on the mainland over recent years had not yet been tamed and inflation had made a comeback.

But he stressed that there was no contradiction between the cooling measures and Beijing's commitment to exchange-rate reforms.

He hinted that Hong Kong was a factor in Beijing's calculations on when and how to proceed with the reforms.

Mr Zhou said Beijing had narrowed the trading band of the yuan during the Asian financial crisis in 1997, but now agreed that the causes of that turmoil had been corrected.

'One of the consequences of the Asian financial crisis is the problem of deflation in some Asian countries and regions, including China and Hong Kong,' he said.

'[Whether] we can change the exchange-rate mechanism affects [how effective we are] in overcoming deflation.

'But now, we can say that the threat of deflation is basically over,' he added.

Mr Zhou said that in finding the right value for the yuan, Beijing would seek a reasonable and balanced exchange rate.

'Current account surpluses and sharp increases of foreign exchange reserves are not our goals,' he said.