Thursday, September 08, 2005

Japan says too early to demand more yuan steps

Thu Sep 8, 2005 08:06 AM ET

TOKYO, Sept 8 (Reuters) - The Chinese yuan has moved very little even after Beijing scrapped its decade-old dollar peg system in July, but it is still too early to demand further steps, Japan's top financial diplomat said on Thursday.

The remarks by Vice Finance Minister for International Affairs Hiroshi Watanabe chimed with later comments from European Central Bank Governing Council member Axel Weber, suggesting the Group of Seven industrial countries would not take a hard-line stance on China at their upcoming meeting.

The G7 finance ministers and central bank chiefs, who meet in Washington on Sept. 23-24, may revise their statement on currency flexibility to reflect China's reform but must be cautious to avoid unwanted speculation, said Watanabe, Japan's representative in preparations for the G7 gathering.

"We have been thinking the first month or two would be a warm-up period anyway," he told reporters, responding to questions about the small trading band the yuan has remained in against the dollar even after the July policy change.

"We're not in a situation where we call for a next step, and the important thing now is how to implement the new system in accordance with the spirit of the reform."

ECB's Weber, who is also president of the German Bundesbank, told Reuters meanwhile in London that the yuan issue needed careful handling.

"The regime now can allow for more flexibility and it's basically up to the Chinese authorities to use this flexibility in their monetary policy environment," he said.

"The transition from one regime to another needs to be done carefully considering all possible effects."


SMALL FIRST STEP

China revalued the yuan by 2.1 percent against the dollar and scrapped its peg to the U.S. dollar in favour of a managed float system referenced to a basket of currencies of its major trade partners on July 21.

Since then, it has risen barely 0.2 percent, closing at 8.0945 to the U.S. currency (CNY=CFXS: Quote, Profile, Research) > on Thursday.

Under the managed float, the Chinese authorities allow the yuan to move within a 0.3 percent daily limit against the dollar and 1.5 percent against the euro.

When the euro jumped sharply against the dollar last week, threatening a break by one or the other outside the daily limit against the yuan, rumour swirled in the market that China was buying the dollar in intervention to defend the range.

Asked about that rumour, Watanabe said it depended on the definition of intervention.

"They do intervene every day if you want to put it that way. They have a centralised foreign exchange system, in which the central bank absorbs all the unfilled buy orders or sell orders in the market at the end of the day," Watanabe said.

"You might see the rates move around a lot 15-30 minutes before the close, and that's probably because the People's Bank of China is buying or selling to absorb the orders."

He said he had already told his Beijing counterparts that setting different daily limits against different currencies had inherent flaws.

"It's not possible to have a 0.3 percent range against one currency and 1.5 percent against another," he said.

Watanabe said currencies and interest rates, while a regular topic at G7 meetings, would be a smaller issue at the upcoming G7 meeting, compared with sky-high oil prices.

"There are not a lot of concrete measures that finance ministers can decide on oil, but the situation has not improved from the last meeting and we need a broader approach," he said of discussions on oil prices.

He declined to comment on how the wording on currencies in the G7 communiqucould be changed.

"Merely changing some words can generate a lot of speculation, so we must be cautious," he said. The statements at recent G7 meetings called for more flexibility in exchange rates of countries with more rigid systems -- widely regarded as referring to China and some other Asian countries.

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