Two Steps Forward, One Step Backward–China to Maintain `Stable’ Yuan

September 30, 2006 at 11:12 pm (China, Economics)

A few days ago, China’s government allowed the yuan to break the level of 7.9 for the first time. When markets are upbeat on a further relax of the currency, China’ central bank interfered the optimism. Read the news from Bloomberg.

As I said before, the yuan valuation is a political issue, rather than an economic one. Let’s hope central bank’s current stance is just a temporary political reverse, because at the end of the day, a further revaluation of the currency is for the good of China, not the rest of world.

 

From Bloomberg

China will maintain “stability” in the yuan’s exchange rate as well as the country’s monetary policies, the central bank said today.

While the market will continue to play a “fundamental” role in setting the value of the yuan, the exchange rate will be maintained “basically stable at a reasonable and balanced level,” the People’s Bank of China’s 13-member monetary policy committee said in a statement on its Web site today.

The yuan completed its biggest monthly advance since a link to the dollar ended last year, as traders wagered China will allow faster appreciation to reward Treasury Secretary Henry Paulson for persuading U.S. senators to drop their threat of trade sanctions. The central bank risks attracting a flood of capital should the yuan rise too rapidly, said Shahab Jalinoos, head of Asian currency strategy at ABN Amro Bank NV in Singapore.

The central bank said it will continue to drain funds from the financial system as it seeks to improve the managed float of the country’s currency. It will also seek to “further curb excessive loan growth” and “strengthen the coordination between domestic-currency and foreign-currency policies.”

China’s currency can only be bought or sold for foreign trade purposes or to fund approved capital-investment projects, making it easier for the central bank to influence trading. Today’s statement summarizes conclusions reached at the central bank’s third quarterly monetary policy meeting (more).

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