Reuters: China Says It Needs Time Before Yuan Adjustment

China Says It Needs Time Before Yuan Adjustment
Tue Jan 25, 2005 11:29 AM ET

BEIJING (Reuters) - China needs more time to prepare for making its currency more flexible, a senior economic official said on Tuesday, pouring cold water on expectations of that long-awaited changes could happen soon.

"China doesn't have conditions to adjust the renminbi (yuan) exchange rate at present," Li Deshui, head of the National Bureau of Statistics, told Reuters in an interview after the bureau's quarterly news conference.

The yen fell 0.5 percent against the dollar and other Asian currencies also were jolted by Li's comments.

Asian currencies have been supported by speculation that the yuan might be revalued early in 2005. Such a move would give Asian currencies more room to rise without making their exports less competitive against China's.

Li is a member of the central bank's monetary policy committee, which plays a vital role in determining interest rates and yuan policy.

He also said there was no immediate need for China to raise interest rates, despite his earlier announcement of faster-than-expected economic growth of 9.5 percent in the year through the fourth quarter.

"Whether we need to raise interest rates will be based on the economic situation. But I can't see any need right now."

In October the central bank raised interest rates by 0.27 percentage point, the first increase in nearly a decade.

A currency change could not happen immediately, Li said.

"Can we achieve such conditions in one or two days? This requires a process," said Li.

"We need a good and feasible plan, and formulating such a plan also needs time."

The comments dented speculation of any imminent policy change, as shown by the Chinese currency derivatives market, where investors bet on the timing and scale of a possible revaluation.

Li's remarks also came ahead of a meeting of the Group of Seven rich nations scheduled for Feb. 4 and 5 that is expected to see officials call for more currency flexibility from China and other Asian countries.

The United States and others have pressed Beijing to allow the yuan, which is pegged near 8.28 to the dollar, to move more freely, saying the current level artificially weak and makes Chinese goods unfairly cheap on world markets.

SPECULATORS WARNED

Li also issued a stern warning to speculators positioned to gain from a possible revaluation.

"Those who hope to make a fortune by speculating on a renminbi revaluation will not succeed in making a profit," he said.

Chinese leaders have insisted they will not embark on reforms as long as speculation is at fever pitch.

Li's comments caused the premium for 1-year non-deliverable yuan forwards to narrow about 6 percent to 3,750 points on Tuesday at 0600 GMT, implying an exchange rate of 7.9 in 12 months' time.

Premier Wen Jiabao said in December that China would move gradually to a flexible currency after taking into account the need for a healthier financial system and economic stability.

Economists have said that the most likely scenario for reform is a slight widening of the yuan's trading band or dropping the dollar peg in favor of a currency basket.

Talk that China may allow the yuan to rise against the dollar has fanned inflows of speculative cash and triggered some Chinese households to convert dollars into yuan.

China's foreign currency reserves rose more than $200 billion last year to nearly $610 billion. But only about $93 billion of that came from the trade surplus and foreign investment. Analysts say the bulk of the remainder was money flowing in from speculators betting Beijing will allow the yuan to rise or re-peg it at a higher level.