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Scholar: Watch deflation after yuan move
(Agencies)
Updated: 2005-07-25 14:02

Last week's 2.1 percent appreciation of China's currency, the yuan, and an accompanying shift to a managed float is expected to win time for China but cannot by themselves iron out the economy's imbalances, Yu Yongding, a member of the central bank's monetary policy committee, said in remarks published Monday.

China's exchange rate reform is a 'slow business', central bank head Zhou Xiaochuan said on May 24, 2005. [AFP]

Yu said the central bank needed to be alert to the risk of deflation if the yuan appreciated further and that the authorities had to be ready at any time to introduce offsetting polices, for instance demand-boosting fiscal measures.

"In the short term, pressure for yuan appreciation will increase further. The change to the currency regime and the small appreciation of the yuan cannot solve China's economic imbalances and the problems of the economy," Yu was quoted by the China Securities Journal as saying.

The paper did not say where or when Yu, who is the only academic member of the People's Bank of China's policy-making committee, was speaking.

He said gradual, controlled appreciation of the yuan in tight ranges could win time for the Chinese economy to adjust.

International financial markets would definitely bet that the 2.1 percent revaluation would not be the end of the currency's appreciation, Yu said.

But the system of a managed float that China has adopted would allow it to contain speculative forces and reduce excessive fluctuations in the exchange rate, Yu said.

And because China has capital controls and other policy tools at its disposal, the authorities could limit the impact of any "attack" on its economy stemming from currency appreciation and market speculations of a further strengthening, he added.

In order to avoid continued market pressure for the yuan to crawl higher, the central bank would pursue its role as market participant in perfecting the process of exchange rate formation, Yu said.

China last Thursday scrapped the yuan's decade-long peg to the dollar and replaced it with a system under which its value will be managed with reference to a basket of currencies.

The yuan will be allowed to move up or down by as much as 0.3 percent against the dollar during a working day. On Friday, the first day of the new regime, the currency hugged a tight range around the new benchmark of 8.11 per dollar.

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