Chinese Pledge Currency Reform

Chinese authorities have told the International Monetary Fund that they intend to reform the system for valuing their currency, the fund said Sunday. But they offered few clues as to whether or when the yuan might rise.

The Treasury Department welcomed what it interpreted as a decision by the Chinese to let market forces eventually determine the yuan’s value.

China pegs the yuan’s value to the dollar at a rate widely viewed in the West as artificially low, giving China’s goods a price advantage over U.S. products on global markets. The U.S. trade deficit with China accounts for one-fourth of the nation’s entire trade gap.

China came under pressure from IMF members at this weekend’s spring meeting to let the yuan float to its natural level on international currency markets.

In a statement to the IMF dated Saturday and released to the public late Sunday, Li Ruogu, deputy director of the People’s Bank of China -- the Chinese equivalent of the Federal Reserve -- seemed to suggest steps in that direction.

“We will push forward the reform of the [yuan’s] exchange rate mechanisms in a proactive, prudent, and sequenced approach,” Li said.

“The future primary task will be to improve the [yuan] exchange rate formation mechanisms, not simply adjust its exchange rate levels,” he added. “China will give responsible consideration to the effects of this reform on the regional and global economies.”

Li said China’s economy overheated in 2004 but had returned this year to sustainable growth rates. In 2005, he said, China will continue to implement “sound fiscal and monetary policies” to promote inflation-free economic growth.

“We will increase the effectiveness of monetary policy transmission mechanisms, intensify adjustments to credit structures, promote the conversion to new modes of economic growth and optimize economic structures,” he said.

“We will further deepen reforms on the foreign exchange management system and promote the balance of payments,” Li added. “Our foreign exchange policies mainly take account of China’s external economy and its overall balance of payments.”

The U.S. applauded the Chinese statement.

“Sustained, noninflationary growth in China is important for sustaining strong global growth, and a more flexible and market-based

IMF officials had no immediate comment.

Rep. James A. Leach (R-Iowa), chairman of the House International Relations subcommittee on Asia and the Pacific, focused on Li’s promise of a “sequenced approach.”

Leach said that might mean periodic adjustments in the exchange rate or the method for determining it, analogous to the Fed’s recent string of interest-rate boosts of a quarter point at each regular meeting.

The Chinese are reluctant to let their currency float on international markets, Leach said, because they want to retain control of the yuan’s value.

During the 1990s Asian economic crisis, Leach pointed out, the Chinese maintained the value of the yuan while the currencies of many neighboring countries were tumbling. Now, he said, the Chinese feel they can again buck the trend and hold down the value of the yuan.