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| Guo Shuqing Deputy Governor of China's Central Bank and head of its foreign exchange administration |
A sharp appreciation of China's yuan was unlikely and the currency would be kept in a small range as the country gradually implemented a more flexible exchange rate, China’s foreign exchange administration head said at the weekend.
As China accounts for about 30 percent of the US trade deficit, the US has been pushing for a revaluation of the yuan. Some economists claim that the currency may be undervalued by as much as 40 percent.
China's State news agency Xinhua has reported that in remarks that gave the clearest sign so far of the degree of currency movement China is planning, Guo Shuqing, director of the State Administration of Foreign Exchange, ruled out allowing the yuan to freely float.
“Sharp appreciation of the yuan is unlikely,” Guo said.
“It is impossible for us to have a free-floating exchange rate,” he said. “A free-floating exchange rate will bring serious consequences.”
But Guo said China had done much groundwork for reform of the exchange rate system, which now holds the yuan in a tiny range of 8.276 to 8.28 against US dollar. The rate was fixed in 1995.
Xinhua says that Guo did not elaborate on how or when China would reform the currency. But his comments were the strongest indication so far that the first step would be small.
“As China is a developing country, the floating range for the yuan exchange rate will definitely be relatively small,” Guo was quoted as saying by the China Securities Journal.
Many analysts say they expect authorities to first slightly widen the slim trading band or repeg the yuan to a basket of currencies instead of just the U.S. dollar.
On the issue of China's foreign exchange reserves, Guo said that short-term currency changes would not affect the structure of China’s foreign exchange reserves - implying that the falling US dollar would not trigger large scale switching of reserve dollars to other currencies.
Today, the Bank of International Settlements (BIS) said that Foreign exchange turnover in Asian currencies grew faster than the global total between 2001 and 2004. Renminbi trading rose particularly strongly. Evolving expectations about the renminbi (yuan) seem to be joining the dollar/yen spot rate in exerting an influence on Asian foreign exchange markets. Asian currencies with more flexible exchange rates appear to be trading with an effective exchange rate orientation.
The April 2004 Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity confirmed that trading in several Asian currencies is growing very rapidly. Whereas global turnover expanded by 57% and 36% at current and constant exchange rates, respectively, activity in most major Asian currencies grew even faster. Renminbi turnover rose particularly strongly.
Three questions follow. First, what drove the rise in Asian currency trading in the three years following the 2001 survey? In particular, what explains the strong growth in some Asian currencies and the weaker growth in others?
Second, could the exceptionally rapid expansion of renminbi turnover foreshadow a stronger influence of the Chinese currency in regional foreign exchange markets? Third, what might the renminbi’s influence mean for the trading pattern of Asian currencies?
This special feature first shows that turnover in Asian currencies increased rapidly between 2001 and 2004. Both global factors such as the search for yield and a secular deepening in Asian financial markets contributed to the strong growth. The article then considers the apparently rising influence of the renminbi on the trading patterns of Asian currencies. Evolving expectations of the dollar/renminbi rate appear to be joining the dollar/yen spot rate in exhibiting significant co-movement with other regional currencies against the dollar. This evidence does not support the conventional wisdom that Asian currencies all trade in a dollar bloc. Instead, this may indicate that Asian currencies are increasingly trading with an effective exchange rate orientation.
Download BIS report (in pdf format).
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