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Yuan to be 'unaffected' by Fed cut
( 2003-07-01 10:19) (Business Weekly)

The Federal Reserve's decision last week to cut United States interest rates may add to pressure to revalue the yuan, but China's central bank is unlikely to trim yuan interest rates in the near term, analysts said.

Tan Yaling, a researcher with the Bank of China's Institute of International Finance, told China Business Weekly: "Given the myriad of uncertainty in the international currency market, leaving the yuan's interest rates unchanged would be the best policy."

The Fed last Wednesday slashed the short-term interest rate by a quarter percentage point to 1 per cent, a 45-year low, in a bid to spur economic growth.

The action marked the Fed's first interest-rate cut this year and the 13th since January 2001, when the Fed funds rate stood at 6.50 per cent and the US economy began to decline into a mild recession.

The Fed hoped that lower borrowing costs could spur consumers to spend more because consumer spending is the main force keeping the US economy going.

Experts said China's central bank, the People's Bank of China, is likely to adjust greenback interest rates accordingly, but is unlikely to change the yuan rates in the near future.

Ba Shusong, a senior expert with the Securities Association of China, told China Business Weekly: "Basically, China keeps domestic interest rates for the US dollar in line with overseas markets to avoid giving room to arbitrage dealers.

"But it is a different story for yuan interest rates."

Ba said that the Fed rate cut is only one of many factors influencing yuan interest rates, since China's foreign-exchange system is still tightly managed and the yuan is not convertible on the capital account.

The yuan can be freely exchanged only on the current account, which allows payments for goods and services.

The one-year interest rate for yuan deposits now stands at 1.98 per cent, while it is 0.8125 per cent for the US dollar.

Experts said the yuan interest rates are mainly decided by changes in money supply and the climate in the international currency market, but neither factor suggests that the yuan interest rates should be adjusted at the moment.

Tan said many uncertainties exist in the current international money market. She said China should learn from the lessons of Argentina, which mismanaged its monetary policy, resulting in the South American country's economy imploding about 18 months ago.

The quarter-point cut, according to the experts, is actually a minor move in a series of US actions to propel the world's largest economy.

Some investors said they felt disappointed at the Fed decision, which defied anticipations of a more aggressive half-point reduction.

Two days after the interest rates cut, US banks had still not passed along the cut by lowering their prime rates, arousing suspicion about the effectiveness of the Fed decision.

Leading Hong Kong banks, which have routinely followed US rate changes, also left their prime lending rate unchanged. Analysts saw this decision as an attempt to preserve the banks' margins in the face of already low interest rates and tough economic conditions in the territory.

"The mainland's interest rate is also already low," said Tan. "Bringing interest rates down to excessively low levels will leave monetary policy-makers barely any leeway to fine-tune the economy."

Experts said that the interest spread between the yuan and the greenback may increase the pressure for the yuan to appreciate, but not significantly.

Gao Huiqing, an expert with the State Information Centre, told China Business Weekly: "The interest-rate gap is still relatively small. Fewer people will sell US dollars and buy yuan to gain more interest."

Most economists agree that the yuan is currently under pressure to appreciate and that the recent slide in the greenback has encouraged new calls for Chinese leaders to revalue the yuan.

But China's central bank reaffirmed that there will be no possibility of the yuan being revalued higher.

"I don't see the possibility of yuan revaluation. We have some control over our capital account," Zhou Xiaochuan, the governor of the bank, said in an interview with Reuters in Basel, Switzerland on Sunday.

The Hong Kong and Shanghai Banking Corp predicted last week that China will not consider revaluing or floating the yuan within the next 18 months.

"In the face of external pressure for a revaluation of the yuan, China appears to pay more heed to internal issues such as increasing the jobless rate and deflationary risks," the bank said in a report.

Tan said that the greenback is still a strong currency despite its current sharp drop against the euro.

"In the international money world, we can see that the United States still decides its monetary policy on its own initiative," she said.

"In setting its monetary policy, the United States is looking at the future, while Europe is looking at the present and Japan is only looking at the past," she added.

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