China promises more market liberalization, including gold

Big Trade Surplus Overshadows China's Reform Pledge

By Eadie Chen and Tamora Vidaillet
Reuters
via Yahoo News
Monday, March 12, 2007

http://news.yahoo.com/s/nm/20070312/bs_nm/china_economy_dc;_ylt=AuiGiQRW...

BEIJING -- China pledged on Monday that 2007 would be another year of extensive financial reform but said there was no quick way to bring down its record trade surplus.

Central bank governor Zhou Xiaochuan said China would pursue reforms in areas including the exchange rate regime, interest rates, foreign exchange derivatives, and the gold market.

In a wide-ranging statement and accompanying news conference, Zhou set out the sort of market-orientated reform agenda that U.S. Treasury Secretary Henry Paulson urged on China during a keynote speech in Shanghai last Thursday.

But on the emotive issue of China's trade surplus, which is stirring protectionist sentiment in Washington, Zhou said the solution lay in deep-seated structural reforms that, by definition, would not have an impact overnight.

"The current trend of imbalanced trade will take some time to be adjusted and addressed," the central bank chief said.

As if to underline his point, China later reported a trade surplus for February of $23.76 billion, three times bigger than expected and the second-biggest monthly total on record.

That took the rolling 12-month surplus to a record $205.2 billion from $183.9 billion in January, providing fresh ammunition to U.S. critics who say China is deriving an unfair trade advantage by holding down the value of its currency.

Zhou said China would introduce more flexibility to the yuan, which has gained a further 4.7 percent since it was revalued by 2.1 percent in July 2005 and allowed to float in managed bands.

The central banker also promised that China, which retains strict capital controls, would let more money flow abroad.

But he added: "The most effective way of addressing imbalances in international payments is to enact policies aimed at bringing about structural adjustments to the economy. First is to encourage domestic demand, particularly consumption and growth in the services sector."

Sharing the podium with Zhou, Commerce Minister Bo Xilai said China was not pursuing a big trade surplus for its own sake. But he, too, cautioned against expecting instant cures.

"The trade surplus does not come about solely or mainly from trade but a result of the overall pattern of the industrial structure and international economy," he said.

The measures outlined by Zhou mark a further step toward a greater role for market forces in an economy that remains a mixture of unbridled capitalism and unreformed state planning.

In the same vein, parliament later this week is due to pass the first law enshrining private property rights since the Communist Party took power in 1949; it will also level the playing field for foreign and domestic firms by unifying the corporate income tax rates they pay.

Zhou said the central bank was studying introducing more currency derivatives so banks and firms can hedge the risks that come with a freer-floating exchange rate.

China would actively push to liberalize interest rates so the cost of money -- the most important price in any economy -- is determined by market supply and demand and responds to the monetary policy decisions of the central bank.

To reduce the dominant role of banks in providing finance to the economy, companies would be encouraged to issue more bonds; even China's gold market would be opened up further, though Zhou did not say how.

One of the headaches of China's huge trade surplus is that it floods the banking system with cash, and Zhou said the central bank would remain active in mopping up the excess money, which it fears will fuel a rebound in investment or speculation in shares.

Since last June Zhou has already increased 5 times the proportion of deposits that banks must tie up in reserve at the central bank, instead of lending out, and he said further increases were on the cards in the months ahead.

Zhou touched only briefly on the new investment agency that China is creating to help manage its $1.07 trillion in reserves.

"When reserves are high, the considerations involved in managing foreign exchange reserve portfolios may vary and there may be some adjustments," Zhou said.

"For example, when reserves are high, you may invest more in long-term assets and there might be some shift in the balance of risk and security of the products you invest in," he added.

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