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China plans further forex moves
(CNN) -- China plans further moves to ease capital controls to help take pressure off its yuan currency, a senior government official is quoted as saying. But analysts say floating of the yuan remains years away, despite recent prodding from the United States. China's yuan is pegged at about 8.28 to the dollar. The United States maintains that this rate is too low and the yuan should be revalued. "We will continue to take a series of positive measures to loosen, appropriately, control on enterprises keeping their foreign currency," China's state-run Xinhua news agency quoted a senior official at the State Administration of Foreign Exchange as saying Thursday. China and the United States agreed on Wednesday during a visit by U.S. Treasury Secretary John Snow that the yuan should eventually float freely, Reuters reported. But Beijing insisted it would not be bullied into acting too fast for fear of worsening unemployment. Snow told CNN Thursday that he would like to see the process of currency liberalization move forward as quickly as possible. Snow claimed that floating the yuan as soon as possible would be good for China, good for the United States and good for world trade. U.S manufacturers allege the yuan is too cheap at its current level, giving Chinese exporters an unfair advantage that is costing U.S. jobs. But economists point out that U.S. companies based in China account for a large share of Chinese exports to the United States. Zhou Xiaochuan, governor of the central People's Bank of China, said this week the goal of making the yuan freely convertible would take "a fairly long time." Certainly, currency analysts expect no fundamental changes over the next 18 months to two years. Andy Xie, chief economist in Hong Kong for investment bank Morgan Stanley, said in a commentary on Thursday that there would be no change in policy "for the foreseeable future." He said China had to reform its financial system before it could open its capital account and change its currency policy. He said these reforms had to address the problems of non-performing loans in China's banking system, regional income disparities, the inability to collect taxes, and a "grossly overvalued" stock market. Xie said that if bad debts grew faster than GDP, China might need to devalue its currency when its exports slow down, rather than revalue. HSBC's Hong Kong-based currency strategist Mike Newton told CNN on Wednesday that he could see no changes to the yuan arrangements in the next 18 months. U.S. President George W. Bush said on Thursday that China's currency policy, a key issue ahead of the 2004 presidential election, was unfair and Washington would "deal with it accordingly" following the talks in Beijing. According to Xinhua news agency, one way the Chinese government can ease pressure is to satisfy the demand for more foreign currency from domestic enterprises and individuals. From October 1, the amount of foreign exchange that Chinese travellers can buy from banks will rise from $2000 to $3000 for each trip, and to $5000 for overseas stays of six months or more. Xinhua also said the government would encourage imports to spur industrial upgrading and help reduce China's trade surplus and slow growth of its foreign exchange reserves. At the end of June, China's foreign reserves stood at $346.5 billion -- second only to Japan's figure of $555 billion at the end of August. "The Chinese government will not likely allow its currency to appreciate by a fairly big margin, and instead is seeking to alleviate mounting pressure from overseas," Xinhua said. Bush could raise the currency issue directly with Chinese President Hu Jintao next month, when they are expected to meet on the sidelines of the APEC summit in Thailand.
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