Chinese central bank governor hints moving to more convertible currency

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Photo - Petar Kujundzic/Reuters

Chinese central bank governor has dismissed allegations his institution enjoys tight control over the flow of yuan and vowed to take measures to widen the currency’s trading band.

In a latest interview with Chinese magazine Caixin, Zhou Xiaochuan, despite not supporting the idea of a fully convertible currency, insisted his country did not fare badly on an International Monetary Fund measure of currencies convertibility under the capital account.

“If the highest standard of measurement is to have wholly unrestricted convertibility, then so many developed countries have not achieved 100 percent full convertibility,” Zhou said in the interview.

Investors and traders are hoping high for the tightly controlled yuan to be free, making it readily convertible under the Chinas current account system.

Beijing closely monitors and manages the trading of services and goods and also the inflowoutflow of different type of capital. Convertible currencies are traded for investment purposes with the basic rules and regulations.

Zhou affirmed that China needs to secure themselves from illegal activities like combat speculative capital flows and money laundering by keen monitoring on the cross border deals of foreign private and public sectors.

“Excluding the above three factors and judging from the 40 sub-items set by the IMF, you may find that actually China is not that far from capital account convertibility,” the central bank governor said.

Still, he hoped, Beijing would soon improve the exchange .”The yuan’s trading band will be widened,” he reiterated.

The yuan trade is in 0.5 range in China and is surely expected to increase the band showing Beijing has stable hands over the currency.

“Compared with international markets, you may know that the 0.5 percent (daily trading band) is quite a small floating band,” Zhou said.

INFLATION CONCERNS DIMINISHING

It was foreseen by the investors during the threeyear high inflation in China that Beijing will certainly widen the yuans trade band but Chinese monetary policymakers instead raised interest rates up to three times easing the inflation to 4.2 per cent in November compared to July’s 6.5 per cent.

“Inflationary pressure is easing, and curbing inflation is not as urgent as in 2011,” he said. “But we should not lower our guard against inflation and must appropriately manage inflation expectations.”

He said he expects inflation to be around 5 percent this year.

When asked whether the drop in Chinas Foreign exchange gave central bank the space to adjust the monetary policy, he said: “China has been always having relatively big scope to adjust its monetary policy

President Hu Jintao in his televised New Year’s address on Saturday, said there would be a balance in the fast economic growth but also warned that there would be some uncertainty in global economic recovery

Yuan closed the year 2011 with 4.7 per cent appreciation and traders still see it appreciating in 2012 as China faces US pressure to balance world trade.

(Written by Manasa Kesiraju; Edited by Moign Khawaja)

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