Zhou: China to increase yuan flexibility

Updated: 2007-05-24 09:01

People's Bank of China Governor Zhou Xiaochuan, under pressure from American officials and lawmakers to reduce his country's record trade surplus, said China plans to further increase flexibility in the yuan's exchange rate.

"We will continue to follow the three principles of exchange-rate reform and increase the flexibility of the yuan," Zhou told reporters before entering the second day of talks between U.S. and Chinese economic leaders in Washington.

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China last week increased the amount it lets the yuan move against the dollar and raised interest rates to cool growth and a swelling trade surplus. U.S. lawmakers said the steps weren't enough to forestall legislation to punish China for maintaining what many charge is an artificially cheap yuan to stoke exports.

US Treasury Secretary Henry Paulson spoke with his counterpart Vice Premier Wu Yi late into the night on May 21 on China's exchange rate, Labor Secretary Elaine Chao told reporters Tuesday.

The yuan is now allowed to rise or fall 0.5 percent a day compared with a daily fixing rate against the dollar. The currency closed at 7.6530 Wednesday in Shanghai, its strongest against the dollar since China abandoned a strict peg in July 2005.


Paulson said in opening the Strategic Economic Dialogue talks in Washington Tuesday that Americans are "impatient" and that the negotiations must produce results that cool "anti-China" sentiment. Wu responded that "politicizing trade issues would only complicate and seriously damage bilateral trade relations."

China has tried its best in reforming the currency, People's Bank's Zhou told reporters Wednesday after a meeting between Chinese economic officials and the House Ways and Means Committee. "I think the current reform of the exchange rate regime and the flexibility is going well," Zhou said.

Zhou said U.S. lawmakers and Chinese officials agreed Wednesday on the direction of yuan's reform, while disagreeing on the speed of the change. The U.S. congressmen "think we can accelerate it, but we think it's already moving fast enough and we have tried our best," Zhou said.

Chinese Premier Wen Jiabao has outlined three guiding principles for adapting China's exchange-rate policy: "independent initiative, controllability and gradualism." The yuan has gained 8.1 percent against the dollar since July 2005, less than the 12 percent gains in currencies such as the South Korean won and Malaysian ringgit.

Domestic Pressure

Zhou admitted Wednesday that his bank is under domestic pressure to slow the yuan's appreciation. "Domestic exporters and some sectors think we are moving too fast. They want us to be a little slower," he said.

China's government is concerned about the negative affect a faster yuan move could bring to low-value domestic manufacturers, exporters and farmers. Yuan gains between 5 percent and 10 percent will put 3.5 million workers in the non-farm industries out of jobs, affecting more than 10 million farmers, the Beijing-based Mirror reported on May 9, citing a report by the Ministry of Labor and Social Security.

Democratic Representative Sander Levin, of Michigan, who chairs the trade panel of the House Ways and Means Committee, said the yuan is undervalued by as much as 40 percent. He said China hasn't used the flexibility in the yuan so far to let it appreciate sufficiently.

"We want to keep the heat on" China, Levin said in an interview Wednesday. "We can't wait, they need to act now" to let the yuan climb against the dollar, he said.

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