07/27/2005, 00.00
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China rules out any further exchange rate changes

Yuan won't be fully convertible for five years. Further economic development requires urgent structural reforms to production system.

Beijing (AsiaNews/Agencies) – State-owned newspapers and the People's Bank of China—the country's central bank—have announced that the value of the yuan will not change in the near future.

The revaluation of the yuan should not be seen as the first step to further adjustments later on, the central bank reported today on its Web site.

State-owned papers had in previous days already stressed that any "expectations for further rises in the value of the yuan were, and are in the future, unrealistic" China Daily editorial page).

Central bank governor Zhou Xiaochuan said right after the adjustment was announced that the new rate corresponded to the current balance with the US dollar.

China won't make its currency fully convertible for at least five years because it is concerned that hedge funds might force the yuan to plunge, said Li Deshui, a member of the central bank's monetary committee.

"There's more than 0 billion to trillion of hedge funds in the world and the Chinese financial system is relatively weak," Li said. "If the yuan becomes fully convertible it would be attacked by these hedge funds."

All official comments underscored the need to preserve a stable currency but they have dampened hopes among Western economic analysts who are generally favourable to revaluation and who expected further action.

For them, any rise in Chinese production costs due the new exchange rate will be minimal and, on the short run, will not affect the competitive edge of Chinese exporters, especially since textile exports are subject to quotas.

Furthermore, they point out that its impact will be minimal on the US's 162 billion dollar trade deficit with China. With foreign currency reserves worth US$ 710 billion, Beijing has the means to keep in check the yuan's fluctuations.

Above all, Western analysts suggest that the Chinese currency is undervalued by at least 40 per cent and that even a 10 per cent revaluation would be insufficient.

For its part, China is concerned that its exports might drop. The profit margins on exports Chinese companies enjoy are very small and even a small jump in the value of the yuan could force many of them to foreclose, creating unemployment.

What is more, this could happen at a time when the country is going through a process of mass migration from rural areas to the cities—official estimates put the number of people moving over the next 15 to 20 years at 300 million.

For some analysts, Beijing should instead change strategy, relying less on exports and more on stimulating domestic demand.

In a country with limited natural resources, only low wages can sustain the current export trend (20-30 per cent growth rate compared to a world average of 6 to 8 per cent).

This situation can only hinder ongoing reforms since any increase in the value of the yuan would threaten exports.

With its 1.3 billion people however, China represents the largest potential consumer market in the world. Higher wages and pensions as well as better health care would increase foreign direct investment as investors would be drawn to the country not because of its export potential but rather because of its huge domestic market. (PB)

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