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Call for measures on shaky currency

THE intervention by China's central bank to stabilise the yuan can succeed only temporarily, according to Hongkong Forex Association president Tam Ping-shing.

He said other measures were needed for long-term stability.

''Unless the exchange rate is stabilised, the interest rate increase announced earlier will be ineffective, because the gain in interest is not sufficient to offset the loss due to depreciation,'' Mr Tam said.

He called for the relaxation of rules restricting entry to the swap market.

''Market forces based on supply and demand should be the long-term objective,'' he said.

He said the volume of transactions at swap centres, estimated to be US$100 million a day, was too low to reflect the yuan's underlying value.

''The flourishing of the black market is mainly due to the limited access to swap centres,'' he said.

He said swap centre rates, which could vary by as much as 20 per cent between markets, should be unified.

China should also speed up the process of unifying its three exchange rates, the official, swap market and black market rates.

He said he would prefer to see a single rate within three years.

''To have three different rates in one country is rare in other parts of the world,'' he said.

''Assuming that the Government will stabilise the swap rate at one US dollar to eight yuan, and that the inflation rate is around 10 to 12 per cent, if the official rate is depreciated at 0.2 fen [one yuan equals 100 fen] per day, the official rate will be unified with the swap rate in three years,'' he said.

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