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China pledges to push ahead to flexible yuan
Updated: 2004-10-02 14:12

China pledged to "push ahead firmly and steadily" toward a more flexible exchange rate without providing a timetable for the shift from a currency peg that is criticized by the Group of Seven industrial nations.

China has fixed the value of the yuan at about 8.3 to the dollar since 1995. Trading partners including the U.S. and Japan say that lowers the currency's value, giving Chinese producers an unfair advantage by making their goods cheaper abroad.

In a statement released on October 1 by the U.S. and Chinese governments after talks in Washington, China repeated its "commitment to further advance reform" and said it would take more steps to prepare its economy for a more "market-based" currency.

U.S. Treasury Secretary John Snow suggested the statement disappointed him. "I have been encouraged by some of the advances that have occurred" Snow told reporters. "I would like to see China move more quickly."

The Chinese declaration echoed comments made on Tuesday by Premier Wen Jiabao and came on the day of an unprecedented meeting in Washington between Chinese officials and finance ministers and central bankers of the G-7, the U.S., Japan, Germany, France, Italy, Canada and the U.K.

Call for `Flexibility'

"The message here is that the Chinese intend to do something, but that they will take their time," said Stephen Jen, head of global currency research at Morgan Stanley in London. A change is still a year away, he predicted.

The G-7 said in a statement at the end of its meeting that "more flexibility in exchange rates is desirable" for the international financial system. Other countries that peg their currencies include South Korea and Thailand.

Snow said a looser exchange rate in China would help contain its inflation now running at over 5 percent and spur the world economy.

Chinese officials, including Zhou Xiaochuan, governor of the People's Bank of China, have talked about scrapping the peg to the dollar in favor of a link to a group, or basket, of currencies, for at least two years. The central banker, who is in Washington for the talks, said in April that giving markets a greater role in setting the value of the yuan is a "top priority."

"We have the feeling that the message has been received," European Central Bank President Jean-Claude Trichet said in a news conference.

China's Emergence

Tonight's meeting reflects the emergence of China as a player in the global economy after its gross domestic product expanded at a seven-year high of 9.1 percent last year. It is now the world's seventh largest economy and the IMF predicted growth of 9 percent this year and 7.5 percent in 2005.

"China's has bigger and bigger influence over global economic development," said Qu Hongbin, an economist at HSBC Holdings Plc. "The G-7 countries can't ignore China."

Earlier this week, Wen said China would implement measures aimed at allowing market forces to play a greater role in determining the yuan's value, the Xinhua news agency reported. "We will further advance the reform and forge a mechanism which is more adapted to the changes in market supply and demand with still better flexibility," Xinhua quoted Wen as saying.

Some steps have already been taken. In June, China and the Chicago Mercantile Exchange struck a deal to create currency derivatives trading in Beijing. The government has also implemented policies to update its financial infrastructure and allow capital to flow more easily.

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