Now is a good time for China to move toward a more flexible exchange rate system, the International Monetary Fund's chief said on March 15, arguing the country's current economic strength would make change easier. Managing Director Rodrigo Rato said greater currency flexibility would allow Beijing to pursue a more independent monetary policy and guard better against external shocks, but he added that the timing of any move would depend more on politics than on economic considerations.
Rato's comments to reporters came days after China's forex chief, Guo Shuqing, said a yuan revaluation would help neither the domestic nor the global economy.
"It is in the interest of the Chinese people and the advantage of the Chinese economy to move towards a more flexible exchange rate system," Rato told reporters in Shanghai, ahead of a dinner meeting with central bank governor Zhou Xiaochuan.
"These types of changes from inflexible to flexible rates should be done in times of economic strength. For China, this is now a good moment."
Nobel Prize-wining economist Joseph Stiglitz said China would be better off introducing an export tax than revaluing its currency.
Speaking in Hong Kong, he said an export tax would have no worse an effect on exporters but would raise money for the government and avoid a fall in agricultural prices - a potential revaluation effect that would hurt farmers and promote unrest.
China raised the cost of exporting key metals, such as aluminium, copper, nickel and ferro-alloys from January 1, making overseas sales less profitable while keeping prices low for domestic users. Nickel and ferro-alloys are component of steel.
The United States and others have called on China to let the yuan float freely rather than manage it in a tight band near 8.28 per dollar, which they say undervalues the currency and gives Chinese goods an unfair price advantage.
But Beijing has insisted on marching to its own beat on yuan reforms.
Premier Wen Jiabao said on Monday China could spring a surprise on markets in deciding when and how it reformed the yuan. The comment was seen as a warning to speculators trying to profit from a rise in the currency.
Speculative and investment inflows have put pressure on the yuan to rise and have helped China's foreign currency reserves swell to nearly $610 billion at the end of 2004.
KEEP COOL: A resulting glut of local currency in the banking system has complicated Beijing's efforts to curtail easy credit to slow the economy.
Rato said Beijing should persist this year in efforts to cool its racing economy. The campaign began in mid-2003.
Despite an expected deceleration in the pace of growth, Rato said China - whose economy grew 9.5 percent in 2004 - and the United States would power world growth, estimated at about 4 percent, in 2005.
"Slower rates of growth of investment are in the best interest of the Chinese economy, both to guarantee the quality of investment and to avoid any risk of overheating," he said.
In its annual review of China in August, the Washington-based lender of last resort had said a soft landing for China, the world's seventh-largest economy, was not assured.
Beijing has said it will reform the yuan, also called the renminbi, only gradually and after solving problems such as overhauling a rickety banking system.
"The restructuring of the Chinese banking system is an essential one to allow the Chinese economy to grow in the future," Rato said.
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