BEIJING -- China may accelerate preparations to loosen the tie between its currency and the U.S. dollar in response to intensifying international pressure for the change, central bank Governor Zhou Xiaochuan said.
"If there is more pressure from outside, it will force us to speed up our reform," Zhou said at the Boao Forum in southern Hainan island today, the first time China's government has said it may alter its schedule for the exchange rate because of overseas interests. He didn't give a timetable.
Finance ministers from the Group of Seven industrial nations last weekend stepped up calls for China to ease the yuan's decade- old peg to the dollar, which the U.S., Japan, and Europe say gives the nation an unfair trade advantage. A more flexible yuan may help China contain inflation and money supply growth amid record foreign- exchange inflows.
"There's no urgency to take the measure," said Bert Hofman, lead economist at the World Bank in Beijing. "For now, they are managing quite well the capital inflows. Despite the buildup in foreign reserves, monetary growth is fairly modest."
China's central bank buys and sells dollars to keep its currency at about 8.3 to the dollar, regardless of market developments. Critics say the yuan became undervalued as the dollar declined in recent years, giving Chinese manufacturers a price advantage that's helped drive the U.S. trade deficit to a record and hampered economic growth in Europe.
China's foreign reserves, the world's second-biggest after Japan's, jumped 50 percent to an all-time high of $659.1 billion at the end of March from a year earlier, as exports surged and investors bet the government will let the yuan appreciate.
Zhou said China welcomes international pressure because it will force the nation to speed up needed financial reforms. Still, "we don't see that the pressure is that strong right now," he said.
U.S. Treasury Secretary John Snow, who led the G-7's April 15-16 gathering in Washington, last week called for China to embrace a more flexible exchange rate immediately. Canadian counterpart Ralph Goodale said China should understand there is a "freight train coming" as the U.S. Senate and European Union weigh tariffs or import restrictions on Chinese goods.
The G-7's sharper rhetoric marked a shift in the group's efforts to coax the world's fastest-growing economy into ending the peg. Some investors said the strategy might backfire, making China less likely to revalue because its leaders won't want to be seen as bowing to outside influence.
"We have a very clear target in this regard, but we have our own sequence," Zhou said at the forum, a two-day gathering of regional leaders. "We are doing some preparation -- for example, the reform of the financial sector -- to enlarge the role of the foreign- exchange market."
Zhou also said overseas manufacturers that complain about the yuan's value should first consider their competitiveness in the international market. "For those companies with real competitive advantage, they will not have to be concerned about the exchange rate," he said.
China's central bank has to buy dollars that flow into the economy to maintain the peg, pushing up money supply and making it harder for the government to slow the economy and stem inflation by reining in bank lending.
China's economy, the world's seventh-largest, grew by a more than expected 9.5 percent in the first quarter, the government said last week. Still, M2 money supply expanded 14 percent and inflation was 2.7 percent in March, both within the government's targets.
"The economic growth rate is not necessarily linked with inflation," Zhou said. "China has a very high savings rate and a lot of investment. The economy may have a higher growth rate."
Zhou said China's inflation rate is "still tolerable." The government will closely watch the producer price and consumer price indexes when considering whether further interest rate increases are needed, he said. The central bank raised its benchmark lending rate for the first time in nine years on Oct. 29, by 0.27 percentage point to 5.58 percent.
"Up to now, we can't say that the 9.5 growth rate in the first quarter would really lead to high inflation," Zhou said.
