Greater China forex flexibility coming, Zhou says

[HenryTo]

An update on Chinese Renminbi policy going forward. Note that the yuan has only risen a further 0.2% ever since the revaluation on July 21st. My guess is that the yuan would actually be trader lower than pre-revaluation level sometime next year.
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Saturday September 10, 4:37 AM
Greater China forex flexibility coming, Zhou says
CALGARY, Alberta, Sept 9 (Reuters) - China is evaluating how it is adapting to its new foreign exchange regime and will move toward greater currency flexibility once reviews are done, the head of China's central bank said on Friday.

But People's Bank of China Governor Zhou Xiaochuan ruled out a further revaluation of the yuan, saying the greater flexibility would come within the foreign exchange framework adopted on July 21.

"After the initial adjustment of 2 percent I think there will be no further adjustment, but the exchange rate level will move ... based on the floating mechanism," he told a gathering of Canadian business and government leaders.

On July 21, China discarded a decade-old practice of pegging the yuan to the dollar, revaluing it upward by an initial 2.1 percent and tying it to a basket of currencies.

In theory, the yuan can rise or fall by 0.3 percent a day, but since the revaluation it has gained only about 0.2 percent in value.

After the forum, Zhou told reporters the central bank and other government agencies were assessing how financial institutions and other businesses are adapting to the new regime, and he said market forces will come to play a greater role in determining the yuan's value when reviews are completed.

"We are going to increase flexibility after a certain period, when we see that domestic financial institutions ... adapt to the new regime," he said.

In the wake of the revaluation, China introduced derivatives to help companies hedge against currency volatility and Zhou said it was important to see how comfortable Chinese firms were with the new hedging instruments.

Many U.S. manufacturers and lawmakers have argued an artificially cheap yuan has given China an unfair trade advantage in global markets. The Bush administration has welcomed China's adoption of the currency basket but has said it expects China to move toward even more flexibility.

China's currency regime is likely to be a topic later this month when finance ministers from the rich Group of Seven nations -- the United States, Canada, Britain, Italy, France, Germany and Japan -- gather in Washington.

European Central Bank President Jean Claude Trichet said on Friday after a meeting of euro zone finance ministers in Manchester that China's abandonment of its dollar peg was welcome, but a further upward adjustment in the value of many Asian currencies was desirable.

"We continue to think orderly and smooth appreciation of these currencies is needed," Trichet said.

Zhou said greater reliance on markets to set the yuan's value could help ease global trade imbalances, but said other countries needed to take steps as well.

"We believe the Chinese effort is helpful to contribute to reduce the global trade imbalance but we know the U.S. has to do a lot of things also," he said, without offering specifics.

Speaking at the same event, Bank of Canada Governor David Dodge welcomed China's step toward a more-flexible yuan and echoed Zhou's sentiment that other countries also needed to play a role in resolving global imbalances.

"We cannot look to exchange rates movements alone to resolve existing global imbalances," Dodge said. "Within the United States, higher interest rates can be expected to lead to increased savings (and) authorities could also encourage greater national savings with tighter fiscal policy."

Zhou said Chinese policymakers were trying to stimulate domestic demand and reduce China's reliance on exports for growth.

In order to do so, he said, the country needed to undertake education, housing and health care reforms to boost consumer confidence, adding that it was not clear low interest rates could give consumers much of a boost.