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Any float of China's currency would be dangerous and could damage the sovereign's credit-worthiness as well as that of local banks, said Standard & Poor's Ratings Services Monday.
Ping Chew, Standard & Poor's sovereign credit analyst for China, said that despite increasing pressure on China by its trade partners, including the United States and Japan, to revalue its currency, preferable by allowing the Chinese renminbi to float, Standard & Poor's considers that lifting of exchange controls at the moment could be risky because Chinese banks are not well-equipped to handle volatility in the exchange rate.
Expanding on the risks of currency float, Paul Coughlin, managing director of Standard & Poor's Asia-Pacific Corporate & Government Ratings, said "we learned from the Asia currency crisis in the mid-1990s that the combination of a weak banking system, floating exchange rates and free flows of capital can be a very dangerous combination."
As with previous challenges, China can be expected to respond to its trade surplus and pressure for revaluation in piecemeal fashion. It might remove export tax subsidies, encourage overseas tourism, overseas investment and more generally will allow the liberalization under the WTO to enhance import growth, the rating services said.
Also yesterday, Fred Hu, managing director of Goldman Sachs (Asia) LLC, said that Chinese currency is "moderately" under-valued and the Chinese government should adopt a more flexible foreign currency policy to relieve the pressure for appreciation.
Addressing the Trend & Opportunity On the Global Investment Market forum in Shanghai, Hu dismissed the notion that the yuan is severely under-valued as some countries have made it out to be.
"Judging from China's capital and currency accounts as well as its economic fundamentals, the Chinese currency is 10 percent to 15 percent under-valued, which is within a moderate range," he said.
Hu also called for the Chinese government to review its eight-year currency policy that pegs the yuan at 8.277 to the US dollar.
"The policy that fixes the Chinese currency with the US dollar has diminished the autonomy of China's exercise over monetary policy," he said.
As a result of the policy, the Chinese currency will have to appreciate when the US dollar strengthens. But if China is not in a strong economic cycle, the strength of the Chinese currency would hurt the country's economy, Hu added.
Worrying that the re-evaluation of the Chinese currency would erode exports as products become more expensive, Hu said the currency rate is only a tiny factor influencing exports.
(eastday.com September 16, 2003)
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