Yuan band to widen

China's central bank governor Zhou today repeated earlier comments that authorities would push for yuan convertibility: China says no timetable for yuan band widening

BEIJING, Sept 21 (Reuters) - China has no timetable for widening the yuan's daily trading band but will continue to take steps to gradually make its currency fully convertible, central bank chief Zhou Xiaochuan said on Thursday.

A recent acceleration in the yuan's strengthening has stoked speculation that Beijing could let it trade in a wider range  -- it is currently allowed to rise or fall by 0.3 percent each day against the dollar and by 3 percent against other major currencies.

Asked by reporters on the sidelines of a financial forum whether China had a timetable for widening the band, Zhou said: "There is no need (for that)."

Pressed on details of a potential band widening, Zhou replied: "It depends on whether the band is enough for the market." Zhou made similar comments last weekend at a meeting of Group of Seven nations in Singapore.

The yuan hit 7.9230 against the dollar on Thursday, its highest level since Beijing revalued it by 2.1 percent and untethered it from a peg to the dollar last July. It has now strengthened a further 2.36 percent since then. But in daily trade, it has normally risen or fallen by only a fraction of what the band would allow.

Zhou also said China would gradually push to allow the yuan to be freely convertible and step up efforts to improve the openness of its financial sector. While the yuan is convertible on the current account, which covers trade, China still restricts most capital account deals and analysts say full convertibility could be years away.

"We will continue to redouble our efforts to develop our financial markets, to widen the openness of our markets gradually and in an orderly way, and to steadily push for free convertibility of the renminbi," he said, referring to the alternate name of the currency.

Comments

[A. PERLA]

Zhou Xiaochuan: "Asked by reporters on the sidelines of a financial forum whether China had a timetable for widening the band, Zhou said: "There is no need (for that)."

Typical. The Chinese are in denial.

They will let the yuan rise occasionally but not all that much. At 0.3% a day and at (say) 250 trading days a year, this gives a maximum potential for it to rise 7-8% per year. And still, 7-8% p.a. is nowhere near the level that will seriously diminish the yuan's disparity and correct the monstrous trade imbalance.

The Chinese are simply mimicking the Japanese postwar reconstruction strategy of low exchange rate to assure continuous export demand (and FDI) that create Chinese jobs.

The problem is this: the imbalance is causing serious disruptions at the level of non-qualified labor in the West presently. When Japan employed this strategy in the 50s and 60s the West (Europe and America) were growing sufficiently to create jobs that would absorb job destruction that Japanese manufacturing caused. The pain was less felt. That is not today's circumstance.

You can't have your cake AND eat it. Except, evidently, in China.

NB: Yes, instead of complaining the West could do more to migrate its unqualified labor more to more qualified levels, which will take decades of training and education.

[angry economist]

What would be the impact of full convertibility/ fully floating the yuan?

[A. PERLA]

>What would be the impact of full convertibility/ fully floating the yuan?

Depends upon interest rate policy. And their willingness to hold the dollar horde they have. If they decide to sell dollars because the yuan keeps appreciating, then the Americans are in for a bad surprise.

The Economist shows this week a projection of the Chinese and American economies (GDP) at parity (market exchange rate) by 2040 - only three and half decades hence.)

What would it take for this to happen? A two speed China where the rich are filthy rich and the poor just filthy? That is, can China create social mobility such that it encompasses its masses. I doubt it. There is not that much global trade out there to bring this about - given China's population.

It will have to develop an internal consumption-based economy that can carry China forward. Can it do that? Maybe. It has the mineral resources it needs. It can develop the necessary energy resources by investing heavily in nuclear energy. It requires a consumer propensity to spend, but that is typical of all peoples. What will stop China is what hinders most democracies. Democracy itself.

In a pluralistic and democratic society, various interest groups compete with one another for both attention and resources. In a monolithic society, as China is today, a comparative few benefit whilst the rest see almost no betterment whatsoever, because they have no or little political voice. They work very hard but the labor/capital ratio remains against them.

So, let's hope China goes democratic very quickly. Then it can stagnate in business cycles like Western democracies. ; ^ )