China will allow its currency's exchange rate to increasingly reflect market
forces over time, the central bank governor said Thursday, responding to calls
from Washington and elsewhere to allow the yuan to strengthen.
"We are gradually moving forward to a more flexible exchange rate," central
bank governor Zhou Xiaochuan said at a news conference following the conclusion
of the African Development Bank annual meeting in Shanghai.
"So I'm sure the Chinese exchange rate will become more and more flexible,
that means reflecting more the market supply and demand relationship," Zhou
China ended a direct link between its currency, the yuan, and the dollar in
July 2005. The yuan was revalued by 2.1 percent at that time and has been
allowed to rise by 5.3 percent against the dollar since then.
Still, U.S. critics continue to claim China keeps the yuan artificially low
against the dollar, giving Chinese companies a price advantages over their
Yuan closes at record high against US dollar
The yuan had its highest close since the central bank ended a dollar link in
July 2005 on speculation the central bank will allow faster appreciation to help
narrow China's record trade surplus.
Premier Wen Jiabao Wednesday said his country will gradually boost
exchange-rate flexibility and take measures to balance trade flows. A stronger
yuan increases export prices and cuts import costs. Vice Premier Wu Yi will meet
U.S. Treasury Henry Paulson on May 22-24 in Washington.
"We've seen pretty strong numbers all these months and we're approaching the
next strategic dialogue," said Huang Yiping, chief Asia economist at Citigroup
Inc. in Hong Kong. "The risks of overheating, over-investment and too much
surplus and liquidity all point in one direction. The currency definitely needs
to go stronger."
The yuan rose 0.15 percent to 7.6707 against the dollar at 5:30 p.m. in
Shanghai, its highest close since the end of the fixed exchange rate, according
to the China Foreign Exchange Trade System. The currency has risen 7.9 percent
since China dropped the link in 2005.
China's trade surplus ballooned 63 percent in April from a year ago to $16.9
billion, the General Administration of Customs said on May 11. Foreign-exchange
reserves rose by a record $136 billion in the first quarter to $1.2 trillion.
Export revenue is flooding the financial market with cash and making it
difficult for the government to cool economic growth, which exceeded 10 percent
for the fifth quarter in the first three months.
"China will gradually increase the flexibility of its currency regime," Wen
said at the African Development Bank's annual general meeting in Shanghai,
without being more specific. The economy still faces the risk of excessive
liquidity, he said.
The yuan may rise 7.5 percent this year, Huang said. The forecast compares
with the 3.5 percent gain to 7.41 by the end of this year, according to the
median of 25 contributors in a Bloomberg survey.
"The central bank has allowed faster appreciation and they'll probably
continue to do that," Huang said.