Yuan to face pressure from dollar next year

The State Information Centre, a top government think tank, warned in a report published in an official newspaper that the yuan would face mounting pressure to strengthen against the dollar next year, but said yuan appreciation would harm China's global competitiveness.

France's Prime Minister urged China to adopt a more flexible exchange rate policy, saying in Beijing yesterday that such a move would reduce China's dependence on exports and raise consumers' purchasing power.

Francois Fillon also called for a more stable international monetary system that would avert sharp imbalances, pointing to a weak dollar as well as China's inflexible exchange rates as being out of line with economic fundamentals.

"A progressive evolution towards a more flexible exchange rate regime would reduce Chinese firms' dependence on the international market and would support an increase in consumers' purchasing power," Fillon said in a speech at the Beijing University of Aeronautics and Astronautics.

Fillon said France would work towards more international co-operation in foreign exchange markets when it heads the Group of 20 in 2011, calling for "a more stable, more flexible system that better reflects the real state of our economies."

Jiang Jianqing, Chairman of the Industrial and Commercial Bank of China, said Beijing should give a chunk of its bulging foreign currency reserves to its commercial banks so that they have more financing power to support firms going abroad.

Jianqing said that borrowers of the foreign exchange could repay the loans in yuan, thereby mopping up some of the cash sloshing about the domestic economy.

"If we could make a small step forward, Chinese companies would take a big step in going abroad," he told a forum in Beijing organised by a research institution under the central bank. His comments suggested that a debate could be heating up about how to make best use of China's $2.3 trillion (Dh8.4bn) in forex reserves, which have started to swell again in recent months on the back of the country's trade surplus and capital inflows.

Jiang did not say what the state-owned banks would give in return for being allocated a bigger portion of China's forex reserves, the world's largest such stockpile.

The Chinese sovereign wealth fund is already the biggest shareholder in the country's major banks via its domestic investment unit, having amassed these stakes when it capitalised the banks earlier this decade.

An unprecedented lending surge over the past year has left Chinese banks looking for ways to replenish their capital cushions, with a regulator saying this week that they might collectively need to raise as much as Y500 billion (Dh269bn).

Jiang did not say whether his proposal was intended as a new round of forex-backed re-capitalisation for the banks.

 

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