China May Widen Yuan Trading Band Next Year, Report Says

(BEIJING) The Chinese government will respond to growing pressure to revalue the yuan by making significant changes next year and possibly even floating the currency as early as 2008, the South China Morning Post yesterday reported economists as saying.

'There will be a widening of the trading band of the renminbi in 2004,' said Hu Biliang, a senior economist with the Chinese Academy of Social Sciences in Beijing. 'China wants to be a respectable global player, so it will consider US and EU concerns. But it also needs to consider its reform needs and will balance it all before making a final decision,' Mr Hu said.

He refused to speculate on how much the People's Bank of China would widen the trading band of the renminbi, which is pegged at 8.28 to the US dollar. But he acknowledged market sentiments the central bank may allow the currency to trade within 0.3 percentage points higher in the coming year and perhaps even more in 2005.

But the leadership would not bow to international pressure to immediately widen the trading band, the SCMP report said.

Donald Straszheim, an independent economist who follows China and is a former chief economist at Merrill Lynch in New York, said Chinese authorities had told him on a recent trip that they wished to have a free-floating currency as early as 2008, in time for the Olympics.

'China wants to be regarded as a fully-fledged member of the global economy by then. That demands a floating currency,' Mr Straszheim said.

Mr Hu refused to comment on whether such a goal existed. But he said the 2008 deadline fell in line with the fact that by 2007 China would have fully implemented its market openings agreement with the World Trade Organization.

'No one knows for sure when the market will be mature enough to handle the volatility of a free-floating currency, but there will be signals,' Mr Hu said.

'By 2007, China's WTO commitments will be fully carried out. So if capital continues to come into China at a narrow trading band, the costs of investments in China will be higher, and 2008 is also the year of the Olympics. These major events will have some impact that may stimulate China to take a big step,' he added.

Yet no one is predicting when the renminbi will have a wider trading band, let alone when it will be floated. 'Even People's Bank of China governor Zhou Xiaochuan doesn't know,' said Mr Hu. 'It's not up to him. It's a market decision.'

Separately, Bloomberg reported Moody's Investors Service as saying that China's exports wouldn't be harmed if the country's currency were to strengthen.

'Regional currencies might appreciate following a yuan appreciation, offsetting losses in competitiveness,' Bloomberg reported Moody's analyst Thomas Byrne as saying. 'Trading partners such as Korea, Taiwan and Japan may also have undervalued exchange rates.'

Shifting to a free-floating currency system is 'not a policy that the Chinese government appears ready to adopt', the rating company said. 'It is a longer-term policy issue that will probably be addressed gradually.' Still, the market perceives the yuan to be undervalued, the Moody's report said, citing an increase in the country's foreign exchange reserves as a reason.