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Newmont''s Lassonde says shortage will push gold to $525 in six months
China Central Banker
Says Hedge Funds Delay
Yuan Convertibility
By A. Craig Copetas
Bloomberg News Service
Monday, July 25, 2005
http://www.bloomberg.com/apps/news?
pid=10000087&sid=a5mvfBkBFZ5I&refer=top_world_news
PARIS -- China won't make its currency fully convertible for at
least five years because it worries that hedge funds may force the
yuan to plunge, much as happened to the Korean won and Thai baht
during the 1997 Asian financial crisis, said Li Deshui, a member of
the central bank's monetary committee.
"There's more than $800 billion to $1 trillion of hedge funds in the
world and the Chinese financial system is relatively weak," Li said
in an interview. "If the (yuan) becomes fully convertible, it would
be attacked by these hedge funds."
China last week ended its currency's decade-old peg to the U.S.
dollar, allowing the yuan, also known as the renminbi, to strengthen
2.1 percent from its previously fixed rate of about 8.3, marking the
first step toward a more flexible exchange rate regime. The U.S.,
European Union and Japan have pressed China to de-peg the yuan and
allow it to strengthen to curb what they say is an unfair advantage
for Chinese exporters.
Li, who is also commissioner of China's National Bureau of
Statistics, said the state of the country's banks is a key reason
why the government won't allow the yuan, also known as the renminbi,
to become a fully tradable currency anytime soon.
"Over the next five years, I do not foresee the renminbi becoming
fully convertible," Li said in Beijing on July 22. "Our banks are
not good enough and the monetary system is not quite up to
international standards."
Economists and institutions including the International Monetary
Fund have urged the world's third-largest trading nation to
gradually make the yuan convertible on the so-called capital
account, which would allow money to flow freely in and out of the
country for investment purposes. The currency is already convertible
on the current account for trade in goods.
The lack of full convertibility of the yuan is "China's last
economic and financial defense," Li said, adding that the government
will "not easily allow" the move.
Chris Leung, an economist with DBS Bank in Hong Kong, said China's
move to full yuan convertibility will hinge on whether the pace of
the country's economic growth can be maintained.
"If the economic growth slows down, the government will have to move
on at a much slower pace," said Leung, who wrote a note on July 20
predicting that the yuan's revaluation was imminent. "There are way
too many problems and contradictions in China's economic development
that need to be solved, so I believe it must be longer than five
years."
China last week said the country's economic growth rate accelerated
to 9.5 percent in the second quarter, from 9.4 percent in the
previous three months, aided by a surge in the country's trade
surplus.
Under the new exchange rate mechanism, the yuan will be allowed to
trade within a limit of 0.3 percent either side of the yuan-dollar
exchange rate published by the People's Bank of China each day. The
yuan will be allowed to trade within a 1.5 percent range either side
of the rate published for other currencies. The exchange rate will
use a basket of currencies, the composition of which has not been
disclosed, as a reference.
The currencies of China's major trading partners will be included in
the basket, Li said. "I'm not talking about just yen, euros, and
pounds," he said, declining to specify the weightings. "You name the
currency, it's in the basket."
China's main trading partners last year in descending order of total
value of trade were the European Union, the U.S., Japan, Hong Kong,
the ASEAN bloc, South Korea, Taiwan, Russia, Australia, and Canada,
according to the country's commerce ministry Web site.
"The reform of the renminbi exchange rate structure will have a
positive impact on China and the global economy," Li said.
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