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Gambling on RMB appreciation risky
By Zhang Dingming (China Daily)
Updated: 2004-10-13 00:02

Issuing a warning to speculators, China said it is unlikely to let its currency appreciate in the near future.

Dispelling growing speculation, the State Administration of Foreign Exchange (SAFE) reiterated on Tuesday that its floating exchange rate regime still fits national conditions.

It also said the Chinese Government's stance remains unchanged and will gradually improve the mechanism through which the renminbi exchange rate is decided while keeping it fundamentally stable.

"Perfecting the exchange rate mechanism is China's own choice, and it will be based on fully considering the endurance of the Chinese society and economy and sharp fluctuations in the exchange rate shall be avoided," a spokesman said.

"Keeping the renminbi exchange rate fundamentally stable... is conducive not only to the sustained and healthy growth of the Chinese economy and society, but to the economic and financial stability of the world."

China has been under foreign pressure since last year to revalue its currency, which some trading partners say is undervalued.

Speculation persisted this year.

It reached a fevered pitch earlier this month when top central banker Zhou Xiaochuan and finance minister Jin Renqing were invited to a G7 finance minister's meeting.

The SAFE spokesman said improving its exchange rate mechanism is one of China's goals, but the pace depends on the nation's economic development, macroeconomic performance, international balance of payments and other related reforms.

"It cannot be done overnight, and there is no timetable," he said.

China's current exchange rate system was created in 1994. Under the system, the renminbi floats against the US dollar in a narrow range that is based on dollar prices in the domestic foreign exchange market.

The essence of China's efforts to improve the renminbi exchange rate mechanism is to make the exchange rate more market-based and improve the flexibility of the exchange rate, instead of simply revaluing the currency, the spokesman said.

The spokesman also warned international currency speculators about the risk of betting on a renminbi appreciation, saying that the ongoing upward pressures on the renminbi have a lot to do with market expectations and interest rate differentials between China and overseas markets, which may reverse their courses at any time in the future.

"From a long-term perspective, the renminbi can both rise and fall after greater exchange rate flexibility is achieved," he said. "It cannot be a single direction movement."

"Gambling on a renminbi appreciation is, at best, a speculative and risky act."

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