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China May Consider Wider Trading Band for Yuan

Reuters
Sunday, 18 Nov 2007 | 8:19 PM ET
Eugene Hoshiko

China's central bank chief said on Sunday it could consider a wider trading band for the yuan currency after finance chiefs from the Group of 20 economic powers renewed calls for greater currency flexibility.

"Actually I think now it is quite OK for the floating band, but if it is necessary we can consider to expand that," Zhou Xiaochuan told reporters, stressing that any yuan move would depend on prevailing global economic conditions.

Finance chiefs from the Group of 20 economic powers said too much volatility and erratic currency movements were unwelcome and put a firm focus on the need to correct global economic imbalances in the face of rising risks to growth and inflation.

"Monetary authorities in G20 countries will need to assess carefully the inflation outlook in light of both tight conditions in commodity markets and the downside risks to growth," a communique issued at the end of the G20 meeting said.

"We also agreed that an orderly unwinding of global imbalances, while sustaining global growth, is a shared responsibility," it added.

G20 Don't Want Volatility

The document stopped short of labelling specific currencies or economies as problematic.

French economy minister Christine Lagarde told reporters earlier the G20 did not want too much volatility or erratic movement, but that talks laid blame on no specific currency.

"We all concurred that the currency situation is one that needs a joint approach, concerted approach. Clearly we don't want to point the finger at anyone and we want to operate by consensus," Lagarde told reporters.

The G20 meetings were held against a backdrop of a sinking U.S. dollar, a painful credit crunch and soaring oil prices.

The dollar's fall to record lows against a basket of currencies as credit conditions have deteriorated in global financial markets since August has been a factor driving up the price of key commodities, particularly oil, fuelling inflation and putting world economic growth at risk.

Adjustment Impacts Euro, Loonie

"There are concerns and concerns in the first place are about very significant changes in energy and food prices. That is having a profound impact (on inflation)," South African Finance Minister, Trevor Manuel told a news conference.

"We can emerge from this meeting having discussed issues and are fully certain that the global economy is going to continue to grow. We had a very deep and challenging discussion on commodity prices, but what we didn't do is beat up oil producers," he added.

Dominique Strauss-Kahn, Managing Director of the International Monetary Fund, said the fall in the dollar was a move in the right direction, but the euro and Canadian dollar were overly feeling the brunt of the adjustment.

"The view of the IMF is that the move in the dollar depreciation is in the correct direction," he told reporters.

"Some currencies don't move as you would expect, mainly those countries that have large current account surpluses. Some are moving very slowly and some are moving in a bad direction and that is a serious concern," Strauss-Kahn said.

"Another concern is that some countries have on their shoulders a much larger part of the adjustment than they should, the Canadian dollar obviously, and as is the case with the euro ... and the case for the Brazilian currency."

Yuan Band Not Only Tool

China's major trading partners, including the United States, have pushed the case for a stronger yuan claiming Chinese exports enjoy an unfair advantage on global markets and fuel global economic imbalances.

China revalued the yuan by 2.1 percent in July 2005, when it also unleashed it from its dollar peg to float within managed bands. China in May widened the daily band for the yuan against the dollar to plus or minus 0.5 percent from 0.3 percent.

But Zhou, who spoke before a later meeting of central bank chiefs, said any move to expand the yuan trading band would depend on global economic conditions and that it would not be the only tool available for Beijing to achieve more flexibility.

Asked if China would increase exchange rate flexibility by necessarily widening the band, Zhou said there were several ways of achieving such an aim.

U.S. Treasury Secretary Henry Paulson avoided any mention of currencies in his post-G20 statement. Instead he focused on discussions around the risks to global credit markets and the wider economy stemming from the U.S. housing market's subprime mortgage crisis.

U.S. Housing Market Decline Unfolding

"In discussions on the decline in the U.S. housing market, I noted it is still unfolding and I view it as the most significant current risk to our economy," Paulson said, adding he was confident that the U.S. economy will keep growing despite the housing strains.

The U.S. economy growth at a surprisingly brisk 3.9 percent annual rate in the third quarter of the year, despite a battered housing sector that has hurt consumer confidence.

The credit crunch which started in earnest in August has brought greater volatility in global markets and threatened to derail the world economy which was enjoying its best growth in three decades earlier this year.

The G20 also discussed the reform of the International Monetary Fund and World Bank to give emerging economies greater say and voting power at those multilateral organisations.

G20 members had also discussed a U.S. proposal on a "best practices" code for sovereign wealth funds that have ballooned in size and number to control more than $2 trillion in recent years as nations have racked up huge trade and oil revenues, raising concerns about investment stability and transparency.