International | May 24 2006
By Chris Shaw (Tokyo)
The US in particular continues to argue China is not doing enough fast enough in terms of making the necessary adjustments to free up its currency and so help correct some of the massive global imbalances its huge trade surplus (or the huge US trade deficit, depending on which side you stand) is creating.
Observers with a more independent view suggest the reform process is an ongoing program of change and is continuing at a pace considered appropriate for the Chinese and their objectives, a statement that corresponds to comments made this week by a spokesperson for the People’s Bank of China.
The comments covered a range of issues, but central were the views on the currency and the domestic banking system. With respect to the currency, the indication is further exchange rate reforms are on the way, but these will in part require improvements in the ability of the banking system to deal in foreign exchange transactions.
At the same time, the central bank is attempting to improve capital account convertibility and expand the ability of both individuals and corporations to take capital out of the economy, as was seen by the recent decision to increase limits on foreign currency holdings able to be taken out of the country and held offshore.
By also facilitating trade and foreign investment the central bank is attempting to achieve a more balanced external account, as it accepts there are negative implications from continually running huge current account surpluses such as is currently the case.
It notes by improving the external account position the balance of the economy would also improve as domestic demand would increase. At the same time, such an outcome would have positive implications for social and economic development in the bank’s view.
The banking sector is also likely to see further reforms as the central bank continues in its attempts to better control the pace of economic growth. While measures to date have met with limited success, the increase in official interest rates last month is likely to be only the first shot in a new series of measures, potentially including increases in bank reserve requirements.
In central bank speak this process is already underway as it points out it has made changes to its guidance, meaning it has put further measures in place to limit lending to over-invested sectors in particular, improve credit control and strengthen capital positions.
Thanks to these changes, the bank suggests there will be a speeding up in the pace of structural adjustment in the economy, which should help achieve its goal of a more sustainable growth outlook.
Pressure from the US to speed up the pace of reforms and adjust its currency will continue, but the central bank’s comments suggest the US and others had best become accustomed to China continuing to introduce changes at its own pace rather than succumbing to any external pressure to speed up its reform measures.
