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China capable of diminishing pressure from RMB appreciation
Updated: 2004-12-02 17:19

China capable of diminishing pressure from RMB appreciation

China is facing the new risk of being attacked by hot money, which is flowing into the country in enormous amounts betting on the appreciation of renminbi, the Chinese currency, but analysts say chances for speculators to win are quite slim, for it is unlikely that the country will change its policy simply because of pressures from outside.

"The speculators are unlikely to succeed as they did in the Asian financial crisis seven years ago," said Vice-Chairman Wu Nianlu of the China International Financial Society.

Some economists believe about US$100 billion in short-term speculative funds sneaked into China in the year's first half.

But they agree this is still within China's capability to manage and it is too early to conclude China would give in to pressures from speculative funds.

Premier Wen Jiabao's statement earlier this week has clearly conveyed a signal that it is not the right time to make big changes in the country's exchange policy.

"The more speculation (about a yuan revaluation) there is in society, the more unlikely it is that the necessary measures can be undertaken," said Wen at the Association of Southeast Asian Nations summit held recently in Laos.

His remarks are considered by analysts as China's ever strongest statement on its currency exchange policy.

Hot money, which occurred after the 1980s, moves among different countries to seek huge profits. Its sudden in- and out- flow would bring serious imbalance in a country's international balance of payment and impair the financial system and the economy at large, which was fully demonstrated in the Asian financial crisis in 1997.

"But, it is hard for hot money to operate in China as the country does not have a developed market of financial derivative products," said Yu Weibin, financial expert with the Chinese Academy of Social Sciences.

As China has no marketplace for forward, futures, options, speculative funds could not snatch money as easily as they did in Thailand and Japan in the 1990s, said Yu. They could only sneak into China through exchanges into renminbi or large-scale purchase of local goods.

China does not allow free capital flow as the case in some Southeast Asian countries. Once the hot money enters into China, it is hard to flee away, said Wu Nianlu.

In the past two years, speculators began to invest in China's real estate, which is considered a "safe" way to make money. China 's housing price has kept rising sharply despite the macro-control and government warnings about "bubbles", which were partly caused by the entry of hot money, analysts acknowledged.

If China does not loosen the yuan's exchange rate, large inflow of hot money would cause inflation and the speculators expect to make profits out of rising prices.

But, experts noted this was also unlikely to happen. China's macro-economic control has proved to be quite effective and China has the ability to prevent inflation through new rounds of macro- economic control.

During the Asian financial crisis, China maintained the basic stability of yuan and made contributions to the region and even the international financial market as a whole. Facing pressures to revalue its currency, China has told the world it will reform its foreign exchange system, but all on the basis of stability and in a gradual way.

The yuan exchange rate has for many years been a managed, floating one based on market supply and demand, but moves within a very narrow band.

In fresh initiatives that economists said were to ease the call for yuan appreciation, the State Administration of Foreign Exchange issued new rules to facilitate the transfer of personal properties denominated in foreign currencies abroad and the use of foreign exchange by Chinese students to study overseas.

The People's Bank of China, or the central bank, has also hiked the benchmark interest rate of US dollar deposits for commercial banks.

President Hu Jintao said during a meeting with US President George W. Bush in Chile a week ago that his country planned to further push forward the floating of exchange rate + but only under the right conditions.

Under the commitment to the World Trade Organization three years ago, China gave no timetable for the exchange rate's liberalization.

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