Banking Reforms in China would Precede China's Foreign Exchange Reform

With fears gaining ground that the appreciation of RMB would hurt the competitiveness of Chinese products on the international market, besides having a negative impact on some foreign-funded export-oriented enterprises, China Reaffirmed its earlier stand that it would not adjust its exchange rate under global pressure from outside world. China's domestic factors, not the "outside pressure," would determine the pace of the country's reform of the foreign exchange system, is the popular belief in Beijing.

The move is feared to accelerate the unbalanced development of different areas in China and stimulate the country's imports of some luxurious goods and raw materials, which are not good for improving the living standard of the ordinary Chinese citizens.

China should and probably would, solve its domestic issues, including enhancing the competitiveness of Chinese banks before fully opening the sector to foreign banks in 2006 and stepping up adjustment of the country's product structure to cope with increasing foreign trade disputes, is the belief of most analysts in Beijing.

Mei Xinyu, a researcher with the Ministry of Commerce in an interview with Xinhua said "It's necessary to allow the Chinese currency Renminbi or, Yuan as it is more commonly known, to float in a more flexible way in order to form a more flexible exchange mechanism in the future," The Renminbi, or yuan, should appreciate from the long term point of view, he said. However, it's not beneficial to China if the RMB appreciates "dramatically" and "in a very short period of time."

Announcing that "Pressure from the outside world would only make China's reform slow down," she said. Zuo Xiaolei, a chief economist with Galaxy Securities, also told a News agency, "The exchange rate cannot be adjusted under the pressure from the outside world,"

She said that the reform, if conducted now under the pressure from the United States and when "hot money" is still speculating on the appreciation of RMB, would very likely lead to the over-appreciation of the Chinese currency, not the "greater currency flexibility" as expected by the Chinese government.

She warned of the risk of introducing the reform of the exchange rate hastily, saying that "It takes time for China to solve its domestic problems."

On Tuesday, US Federal Reserve Chairman Alan Greenspan called for a more flexible exchange rate for the Chinese currency even as he believed that the impact of any change on the American economy would be minor.

Greenspan told a Beijing banking conference via satellite from the United States "The issue of allowing flexibility in some form in the RMB strikes me as very much to the advantage of China."

Analysts, however, argued that it's wrong to interpret Greenspan's remarks as suggesting the revaluation of the Chinese currency.

Chinese central bank governor Zhou Xiaochuan said that "We will push forward the reforms step by step. Past experience has told us that gradual reform is successful,"

The yuan is currently pegged at 8.28 to one US dollar and China has come under pressure from trade partners, mainly the United States and the European Union, for changing an exchange rate that is seen as bgiving its exporters an unfair advantage.