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Peggy Sito

Beijing will adopt a more flexible currency-exchange rate after its entry to the World Trade Organisation, central bank governor Dai Xianglong says.

'After WTO entry, there will be bigger changes in the balance of payments along with changes in foreign trade and investment,' the state-owned Financial News quoted Mr Dai as saying in an interview with United States-based BusinessWeek.

'The exchange rate will have some flexibility.'

China is expected to join the WTO late this year.

Mr Dai gave no timetable for the move. The People's Bank of China, which intervenes in the market to ensure the yuan trades within a thin band, kept the currency between 8.277 and 8.28 to the US dollar for more than three years after the Asian financial crisis.

But the bank seems to be relaxing its grip. It has allowed the yuan to close outside the thin range more than 40 times since April last year, though only twice outside the weak end, according to Reuters.

Yesterday the currency closed at 8.2775 compared with Tuesday's 8.2774.

The yuan is convertible only on the current account, which covers mainly trade and services, and is now well supported by China's healthy balance-of-payments surplus.

Economists said Beijing would allow a wider trading band for the yuan as it opened up the banking sector to foreign participation.

Mr Dai said: 'Generally speaking, we will continue to implement and improve the current exchange system.' The economy was now sound and 'the yuan exchange rate is stable and has a solid foundation'.

Early this month, Premier Zhu Rongji vowed to maintain the stability of the yuan over the next five years.

George Leung, chief economist at HSBC (HK), said: 'Keeping the yuan stable means that China does not want to see any big fluctuations.'

Mr Leung said a managed floating-rate system was 'a must' as China would fully open the banking sector after WTO entry. But he believed it would be a gradual process.

He said Beijing must increase the flexibility of its currency if it planned to liberalise the interest-rate system within three years. 'They are waiting for the right timing,' he said.

Reuters quoted Song Guoqing, chief economist at the China Stock Exchange Council, as saying that controls over the exchange rate were expected to loosen after WTO entry.

'But sharp fluctuations in the exchange rate are quite unlikely if inflation is checked, because any changes in the balance of payments can only happen gradually,' Mr Song said.

To strengthen the financial sector and the trust sector in preparation for foreign competition, the central bank is drafting several sets of rules this year, including guidelines for bankruptcies of financial institutions.

China Securities  quoted a central bank official as saying the bank also would draw up rules on foreign financial institutions operating in China, bank cards, security of information for personal deposits and measures against money-laundering.

The People's Bank of China would 'make full use of legal means to help rectify and standardise the financial order', the newspaper said.



Central bank governor says there will be flexibility after entry to world trade body