China's central bank governor last night denied that yesterday's widening of the renminbi's trading band against non-dollar currencies signals greater general flexibility in the exchange rate regime.
People's Bank of China Governor Zhou Xiaochuan told Emerging Markets in an exclusive interview that the move was a 'policy adjustment based on the requirements of [China's] commercial banks'.
Zhou said he saw no reason why the yuan should be adjusted to influence China's trade surplus with the US, and insisted that it should move in line with the country's global trade balances.
The Central Bank Governor said there was only a 'slight' chance of the US imposing tariffs on imports from China if the yuan does not appreciate further. But he called the danger a 'loose gun' and warned that it could damage the US more than China.
China said yesterday it would double the yuan's trading range against currencies such as the euro and the yen, to plus or minus 3%, but that it would continue to fluctuate by 0.3% against the dollar.
This move was taken because China has 'diversified trading and economic relationship with many smaller countries' and the yuan needs to be able to adjust to reflect this fact, said Zhou. It will allow Chinese commercial banks more 'flexibility,' he added.
Zhou doubted whether the latest move would result in anything other than minor fluctuations against major currencies such as the dollar, the euro and the yen. 'We don't think the RMB exchange rate should reflect China's trade balance with the US,' he said.
'We think China should allow the exchange rate to play the role of bringing our trade balance with other countries in the globe into balance,' he said, noting that China has 'quite large' trade deficits with Asia.
China will see 'whether the [present] RMB exchange rate can bring the current account into tolerable balance,' before deciding on any further moves he said. 'We have given some flexibility to the exchange rate, so we are depending on the market to look at the supply and demand relationship and to try to seek [balance] in the exchange rate.'
Zhou said he believed the possibility of the US imposing special tariffs on imports from China unless it revalues the yuan more substantially against the dollar is very small.
'In today's globalized world, decision makers should realize that we really depend upon each other and that such kind of protectionist measures could bring very serious consequences,' he declared.
'But if such a measure is adopted, decision makers should think about who is going to suffer most. We believe it is a loose gun. The impact on China will probably be smaller than on the US economy. It will damage the image of the US economy and it will damage the WTO principle. It will also damage free market economy principles.'
Zhou attended a special lunch organized yesterday by the G7 for five non-member countries - China, India, Russia, Brazil and South Africa.
The move was meant to signal greater consultation between the world's most advanced economies and five leading emerging markets. But Zhou declared that it had been 'too short' to be meaningful. 'No one really knows what is the area for discussion and coordination in the future,' he said.
'The international monetary system needs a lot of reform because we are facing so many challenges,' he said. 'We need to complete the (WTO) Doha Round, and while capital flows are good they are sometimes irregular. We need the Bretton Woods institutions to play some kind of new role in international markets.'
Most of all there is a need to 'define' problems in the international monetary system better and then to act on them, said Zhou.
He suggested that oil prices are likely to 'remain relatively high because of imbalances in supply and demand' and this would 'generate inflationary pressures for many countries'.
But China has 'room to accommodate' the inflationary impact of rising oil prices, he said, because inflation is running at low levels 2.1% between January and August and currently at an annual rate of 1.3%. But price rises were a signal for China to look to new energy sources and to conserve energy , he added.