Chinese Media Signal Interest in Currency Reform

Posted August 16th, 2011 at 1:30 am (UTC-5)
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Chinese state media are signaling an interest in allowing China's currency to rise more rapidly against the dollar.

A front-page editorial in the government-run China Securities Journal said Tuesday the time is right for Beijing to widen the trading range of the yuan in order to help combat inflation.

The widely read China Daily, meanwhile, quoted an analyst saying the United States' recent debt problems show China has no option but to rebalance its economy and reform its currency regime in order to slow its accumulation of U.S. reserves.

The articles appear on the eve of a visit to China by U.S. Vice President Joe Biden in which economic issues are expected to figure prominently.

The United States and other countries say China's currency is severely undervalued, giving it an unfair trade advantage by making its products cheaper overseas. China has allowed the yuan to rise by about 7 percent since June 2010, and argues a more rapid increase would disrupt its economy.

However, economists say a rising yuan would also help China to combat inflation, which stands at a three-year high and is contributing to political unrest. Economist Yao Wei argues in China Daily Tuesday that allowing the yuan to trade more freely would also provide China with alternatives to placing more and more money in downgraded U.S. Treasury bonds.

The China Securities Journal argues for a change to current government policy which sets a dollar-yuan exchange rate each day and then allows trading within half a percentage point above or below it. By contrast, China allows a 3 percent trading range against the euro and the yen.

The article says the lack of flexibility against the dollar has made Chinese exporters unwilling to accept the more volatile non-dollar currencies in trade.

China is the United States' biggest creditor with about $1.17 trillion in U.S. Treasury holdings.