China Says It Will Pursue a `More Flexible' Currency

Nov. 6 (Bloomberg) -- China's central bank said it plans to ``create a more flexible exchange-rate mechanism,'' responding to an International Monetary Fund recommendation that the yuan's peg should be relaxed.
``We will take measures in various ways to further this reform, in a gradual and steady manner,'' the People's Bank of China said in a statement on its Web site. In keeping with earlier government comments, it didn't give a timetable. The IMF said yesterday that a more flexible currency would help China achieve a gradual economic slowdown.
China buys dollars to ensure the yuan stays at about 8.3 per U.S. dollar. The government is concerned that a loosening of its nine-year-old currency peg might trigger capital inflows, hampering state efforts to cool the economy, according to the IMF report. Investment from abroad forces the government to issue more yuan, boosting the money supply.
China wants some ``fluctuation'' in the yuan while limiting exchange-rate movements, Guo Shuqing, head of the State Administration of Foreign Exchange, was cited by China Reform Daily as saying on Nov. 4.
The Singapore dollar yesterday rose to its strongest in almost five years, leading a rally in Asian currencies, on speculation China will allow the yuan to gain in the months ahead.
Asian Currencies Advance
``The yuan appreciating gives more room for Asian currencies to follow,'' Thio Chin Loo, a currency strategist at BNP Paribas in Singapore, said yesterday.
Singapore's currency yesterday rose 0.2 percent to close at S$1.6593 per U.S. dollar. It rose to S$1.6529, the strongest since Jan. 5, 2000. The Taiwan dollar climbed as high as NT$33.025, the most since April 27, according to Taipei Forex Inc. It may advance to NT$33 by year-end, Thio said.
The South Korean won gained 0.3 percent to 1,110.55 against the dollar at its close at 4 p.m. Seoul time, according to Seoul Money Brokerage Services Ltd.
The yuan ``policy is being discussed more frequently and with a bit more detail,'' David Simmonds, a senior currency strategist at Royal Bank of Scotland Group Plc in Singapore, said yesterday. ``The idea that discussion about some sort of policy change is a meaningful one and they are preparing to make some sort of adjustment at some point is entirely credible.''
His bank expects China will peg its yuan to a basket of currencies in the middle of 2005.
Forecasts
Merrill Lynch & Co. said it expects China to ease its yuan peg before the end of this year. JPMorgan Chase & Co. forecasts it will happen in three to six months.
Currency traders yesterday raised bets the yuan will gain, pushing forward contracts to a seven-month high.
The yuan would rise to 7.917 against the dollar in a year if freely traded, forward contracts showed at 4:05 p.m. yesterday in Hong Kong, from 7.977 late in Asia on Nov. 4. The contracts allow investors to bet on the future value of a currency that isn't fully convertible or hedge investments that are denominated in it.
The gap between the fixed exchange rate and the future value of the yuan implied by the forward contracts widened to -0.3600, compared with -0.3000 late yesterday in Asia. The gap expanded to as much as -0.3850, the widest discount since April 2.
China has imposed lending and investment restrictions as it tries to slow growth from a seven-year high of 9.3 percent last year. The central bank on Oct. 28 raised its benchmark interest rate for the first time in nine years and Vice Finance Minister Lou Jiwei today said the state will invest less next year to help bring about a sustainable pace of growth.
Cut Investment
``We will reduce the size of the budget deficit and cut public investment,'' Lou said at a Beijing conference attended by senior government officials. ``The success we have achieved in adjusting economic growth is still preliminary and incremental.''
Expansion in the world's seventh-largest economy eased to 9.1 percent in the third quarter from 9.6 percent in the previous three months and the State Information Center predicts growth will ease to 8.7 percent this quarter.
The government is trying to cool expansion in industries including autos, steel and cement it says are expanding too rapidly, clogging transport links and straining supplies of electricity and raw materials. Central bank Deputy Governor Li Ruogu said last month growth of 7 percent to 8 percent would allow for a healthy economy for the next two decades.
Inflationary Pressure
Growth is expected to slow to 8.5 percent next year from an estimated 9.3 percent in 2004, the State Information Center said in its 2005 China Industry Development Report, which was released at the conference.
The center, a research unit of the State Development and Reform Commission, China's top planning body, said it expects fixed-asset investment to rise 21 percent this quarter and inflation to average 3.8 percent.
M2, the broadest measure of the money supply, is expected to increase 16 percent to 17 percent next year, the report said. The indicator, which includes cash and all deposits, rose 14 percent in September, staying within the central bank's 17 percent target for a fourth straight month.
``The current money supply growth is basically appropriate,'' the central bank said in today's statement. Still, ``we see a comparatively large amount of fixed-asset investment and inflationary pressure.''
Fixed-asset investment rose 28 percent in the first nine months, outpacing the economy's 9.5 percent growth. Inflation slowed to 5.2 percent in September from a seven-year high of 5.3 percent in each of the previous two months.