Thursday, November 25, 2004

There is a very revealing article on Zhou Xiaochuan recently on the WSJ. First, Zhou is a true technocrat with an in-depth knowledge of economics (though he is still politically savvy). Second, PBOC and SAFE will likely decrease restrictions against taking money out of China (they already have--but more will come), but continue to limit money flowing into China. Trust me, there are still a lot of people who want to move money out of China. Finally, I think this article underscores the infinite patience of the Chinese government. A reader earlier suggests that the Chinese government and international speculator are playing a waiting game to see who will give in first. However, this is necessarily a losing game for international speculators, who are leveraged and have termed contracts. In contrast, the Chinese government can bear the costs (monitoring cost, enforcement cost, cost of sterilizing hot money). Also one has to remember that the government has to bear a cost for revaluating´╝Üheighten unemployment pressure, slower growth, and expectation of future revaluation.

China Official SuggestsCurbs on Yuan to Ease
Move to Full ConvertibilityWould Be Taken in Steps,Central-Bank Chief Says
DOW JONES NEWSWIRESNovember 25, 2004
SHANGHAI -- China's central-bank Gov. Zhou Xiaochuan foreshadowed more reductions in the currency controls that restrict the yuan's convertibility, but the central-bank chief stressed that the move to a fully tradeable currency won't be taken in one step.
China repeatedly has stated that full convertibility of its currency, with a value determined by market forces, is the ultimate objective of government's foreign-exchange overhauls. But to get there, China needs to dismantle many of the restrictions on currency convertibility that Mr. Zhou conceded have no purpose but to create an image of a restrictive policy regime.
At a small gathering of Chinese entrepreneurs and MBA students at Peking University's School of Management on Nov. 16, Mr. Zhou made the case for removing some of those unnecessary restrictions on the currency. According to speech notes and a transcript of a question-and-answer session, he said half the items under the country's capital account are already convertible.

Flexibility, or allowing the yuan to trade more freely on the current account within the existing foreign-exchange regime, and full convertibility, allowing free movement of capital in and out of the country, are two different issues. While analysts expect some widening of the yuan's trading band on the current account, officials in China have been reluctant to move swiftly on convertibility, fearing a potential capital flight, especially from the state-dominated banking system.

Even amid those concerns, Mr. Zhou argued the case for streamlining the current system of capital controls. He said China's regulators have found there are still some unnecessary foreign-exchange restrictions that have no effect except creating the perception of being "restrictive."
"We need to get rid of such ineffective restrictions so that the supply and demand on the country's foreign-exchange market can be more price-oriented and let supply and demand determine the price," Mr. Zhou said. He didn't specify which of the remaining restrictions are ineffective, but he stressed than any currency overhaul would be incremental rather that taken in "one step."

Mr. Zhou also rejected the notion that the central bank's Oct. 29 announcement of the country's first interest-rate increase in more than nine years was a sudden decision. "Actually, the talk about a rate rise lasted for a long time before it really happened, so generally speaking, I don't feel it was too sudden," he said.

The central bank's "monetary-policy board discussed" the rate increase "for many rounds" before a decision, he said. "But it isn't necessary for the public to know in advance no matter if it's a rate move or some other kind of monetary policy."
Meanwhile, BOC Hong Kong (Holdings) Ltd. said yesterday that it sees a far smaller chance of an imminent yuan revaluation than market expectations.
BOC Hong Kong -- the local unit of Bank of China, one of the country's four largest banks -- issued the statement in its latest monthly economic review.
"If the yuan is forced to revalue even by a small percentage, suggesting the government is bowing to pressure brought by hot money, it may lead to even greater revaluation expectations down the road," it said.

It suggested Chinese authorities could strengthen measures currently in place to address the problem of money inflows drawn by speculation over the yuan. These include improving procedures and enforcing rules governing banks' foreign-exchange settlements and relaxing controls on capital outflows.

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