Economy

China: Fast yuan revaluation no panacea

(Agencies)
Updated: 2010-10-11 11:01

WASHINGTON - Demands that China rapidly revalue its yuan currency are akin to seeking a magic cure to a problem that requires a slow-working, herbal remedy, the country's central bank governor, Zhou Xiaochuan, said on Sunday.

China would continue reform of the formation mechanism of its currency exchange rate to improve its flexibility, but it depends on carefully gauging economic fundamentals like inflation, growth and employment, said Zhou, the head of the People's Bank of China.

"China would like to use more gradual ways to realize a balance between domestic and external demand," he said, repeating the message he drove home at the weekend's International Monetary Fund meetings.

Zhou, speaking to a seminar on the sidelines of the IMF gathering, used a metaphor of the differences in medical practices in the East and West to highlight the challenges faced in addressing the currency debate.

"In China, a lot of people believe in Chinese doctors. In Western countries, they believe in Western-trained doctors," he said.

The currency debate is like a contest between "pills that solve your problem overnight" and Chinese-style treatments of "10 herbs put together ... that solve the problem not overnight, but maybe in one month or two months," Zhou said.

Zhou and his deputies pushed back at the IMF meetings against a chorus of pressure for China to let the yuan rise further and more rapidly than the 2 percent gains seen since June 19, when Beijing loosened the yuan's peg to the US dollar.

Zhou earlier told reporters during the IMF meetings he believed the currency issue might "gradually fade out along with the recovery" of Western economies and job markets.

"For China, we have a package to enhance the internal demand including ... consumption, social security system reform, new investments in the rural areas," he said.

These measures, he told reporters, show "that China sincerely wants to bring the current account surplus down to a reasonable level."

China faces trade-offs between its economic fundamentals and trade surpluses, Zhou said.

"It is quite a complicated art to perform, but if we successfully keep low inflation... the yuan is going to be stronger," he said.