Chinese Finance Leaders Commit To Move To Flexible
Exchange Rate
In a joint economic statement issued with the US, China's
financial representatives at the G-7 economic meeting
in Washington, DC, committed to moving to a more flexible,
market-based currency. The statement, issued by Chinese
finance minister Jin Renqing and Zhou Xiaochuan, head
of the Peoples' Bank, China's central bank, and Fed chairman
Alan Greenspan and Treasury secretary John Snow, marked
a significant step to currency liberalization.
The Chinese did not commit to a timetable as to when
they would shift to a flexible currency. Nevertheless,
this is seen as a significant victory for the Bush administration,
which has come under significant pressure from US manufacturers
to lean on the Chinese.
Inside China there has also been pressure building for
a more flexible currency system. As the consensus builds
in China that it is assuming more characteristics of a
developed country, public sentiment is shifting to a flexible
exchange rate. However, because the wealth gap is widening
between the cities and countryside, there are still strong
conservative elements who favor the dollar-yuan peg.
Another reason for China's delay is its reform of the
state-owned banking sector, which has only recently been
re-organized into joint-share companies. Bank regulators
argue that floating exchange rates would put strong pressure
on the banks when they are still weak from the recent
changes.
With China's rise in economic importance, the dollar-yuan
peg has become a US election year issue. The Democrats
have threatened to investigate the dollar-yuan peg as
an unfair trade issue.
Seen in this light, Friday's announcement comes as a
needed time-buying move for both the US and Chinese sides.
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