China Says Will Move on Yuan in '05

Sat Feb 26, 2:00 AM ET Business - Reuters



BEIJING (Reuters) - China will gradually open its capital account in 2005, another step in its plan to make the yuan currency fully convertible, state television said on Saturday, quoting the country's foreign exchange chief.

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China, facing criticism from the West that a cheap yuan gives its factories an unfair competitive edge, has held its ground against demands it revalue -- but has promised to progressively free up trading in the currency.


"We will gradually ease the amount of renminbi that can be exchanged under the capital account, taking another step toward achieving full convertibility of the renminbi," the television quoted Guo Shuqing, head of the State Administration of Foreign Exchange, as saying.


Guo also said China would support insurance companies, which took in 431.8 billion yuan ($52.2 billion) in premiums last year, to invest in stocks overseas, potentially increasing the outflow of currency to balance huge inflows.


"China will support insurance companies to set up insurance funds or carry out securities investments abroad," he said.


Beijing is studying the much-anticipated plan -- known as the Qualified Domestic Institutional Investor (QDII) scheme -- but has yet to give a firm timetable.


Last August, China allowed domestic insurers to buy $8 billion in overseas debt, bringing them a step closer to winning permission to invest in overseas stocks.


China has been under pressure from the United States and other countries to free up its currency, known as either the yuan or renminbi.


U.S. manufacturers argue the current fixed exchange rate of about 8.28 to the U.S. dollar is too low and amounts to an unfair trade advantage.


CAUTIOUS APPROACH


China's central bank chief Zhou Xiaochuan said earlier this month the yuan was not substantially undervalued given the country's balance of payments and that China would follow its own reform timetable.


But Zhou, speaking in London this month for the Group of Seven talks, added that any reform would require a stable macroeconomic environment, healthy financial system and that the impact on the global economy should be considered.


Finance Minister Jin Renqing, also in London for the G7 summit, said China would reform the currency only after tackling other problems, such as the sickly financial system.


Some foreign analysts estimate the bad-loan rate for China's state-owned banks is about 40 percent.


Beijing has also made clear its disdain for speculators, and has repeatedly said it would not move when the betting on a change was at fever pitch.


While the government has resisted foreign pressure to free up the yuan, it has tried to encourage some capital outflows to help relieve pressure on the currency to rise.


This week, China unveiled steps to curb short-term foreign debt incurred by importers and let domestic firms retain more hard currency income, the latest steps to ease upward pressure on the yuan and lay the groundwork for a more flexible currency.





The yuan is convertible on the current account, which covers trade flows, but subject to tight curbs on the capital account, which covers investment.

China's central bank is being forced to issue huge amounts of yuan to soak up foreign inflows, a process economists say is helping fuel lending and inflation.

Much of the inflows are from investors seeking short-term profit if the yuan's value is increased.