REUTERS:17:52 19Oct09 -INTERVIEW-Yuan to rise anew as China economy perks up-researcher

17:52 19Oct09 -INTERVIEW-Yuan to rise anew as China economy perks up-researcher
    * Yuan appreciation is part of China's exit plan
   * Beijing needs specific timetable for yuan's global role
   * Hong Kong should be testing ground for more yuan products
   * Open-market operations top choice for policy fine-tuning
   
   By Vivi Lin and Alan Wheatley
   BEIJING, Oct 19 (Reuters) - The yuan will resume its modest appreciation as part of China's strategy of exiting from its ultra-loose pro-growth policy once the economy is definitely out of danger, a prominent government economist says.
   Since the financial crisis intensified in mid-2008, China has in effect re-pegged the yuan <CNY=CFXS> around 6.83 per dollar to help its export industries and to cement financial stability.
   "As the economy recovers and when the worst is over, the yuan is likely to return -- within the framework of a managed floating exchange rate -- to a path of 'modest appreciation with two-way fluctuations'," Ba Shusong, a senior research fellow at the Development Research Centre, a think-tank under China's cabinet, told Reuters Television.
   Just as halting the yuan's climb was part of Beijing's response to the crisis, a resumption of the rising trend that prevailed from July 2005 to mid-2008 would be necessary once the economy was back on a solid footing.
   The yuan gained almost 20 percent against the dollar over that period following an initial 2.1 percent ruation.
   "A flexible, modestly appreciating exchange rate with two-way movement will help China's economic restructuring," Ba said. "An appreciating currency will help to boost domestic demand and balance external demand."
   Ba, who is also the chief economist for the China Banking Association, said Beijing also needed a stronger yuan to dampen price pressures, especially import-driven inflation.
   But he said a spike in the yuan was still unlikely, partly because the exchange rate alone cannot address China's massive surpluses on the current and capital accounts.
   A Reuters poll issued on Oct. 8 showed that the market, too, expects a very gradual rate of climb -- to 6.75 yuan per dollar in 12 months' time. [ID:nN07480911]
   
   CLEAR TIMETABLE
   Ba urged the government to map out a clear timetable to raise the global profile of the yuan. Doing so would galvanise decision-making on the issue, which was spread among an array of government bodies.
   "China's share of global trade is rising. China's role in international capital flows is growing. But the role of the yuan itself and of yuan-denominated assets in the international market is tiny, which is a serious mismatch," he said.
   Ba said history had shown that setting deadlines can make a difference. The prospect of China's entry into the World Trade Organisation, finally achieved in 2001, forced policy makers to reform the banking system fundamentally.
   "In 1997 and 1998, China's banking system was widely viewed as a time bomb for the Chinese economy," he said. "But now it's being hailed for how well it has handled the crisis."
   China has been promoting the international role of yuan in a variety of ways. The central bank has signed currency swaps with six central banks totalling 650 billion yuan. Beijing has launched a pilot scheme to settle trade in Hong Kong and Macau in yuan. The Ministry of Finance has issued yuan bonds in Hong Kong.
   But Ba said Beijing needed to develop more yuan instruments to encourage the use of the currency overseas.
   "What will overseas exporters do with the yuan they earn? China needs a market for yuan products so that overseas holders of yuan have a better choice than just depositing their money in the bank," he said.
   
   HONG KONG AND HOME
   Hong Kong would remain the principal testing ground as Beijing turns the yuan into an international currency, Ba said.
   Now that the finance ministry has sold bonds in Hong Kong, why not let firms do the same, he asked. Yuan-denominated insurance policies would be popular in Hong Kong as well given confidence in the prospects for China's economy and the yuan.
   Turning back to the domestic economy, Ba said China was unlikely to change its basic policy thrust, namely a relaxed monetary stance and proactive fiscal policy coupled with adjustments to money market liquidity.
   "Fine-tuning will be the key ... and open-market operations should be best classified as fine-tuning," Ba said.
   "Other tools like reserve requirements and interest rates may be a secondary consideration because they are not as flexible as open-market operations," he said. (Writing by Zhou Xin; Editing by Alan Wheatley and Neil Fullick) ((xin.zhou@thomsonreuters.com; +8610 6627 1220; Reuters Messaging: xin.zhou.reuters.com@reuters.net)) ((If you have a query or comment on this story, send an email to news.feedback.asia@thomsonreuters.com))
Keywords: CHINA ECONOMY/  
  

Monday, 19 October 2009 17:52:24RTRS [nPEK171451] {C}ENDS