GENEVA — The Bank for International Settlements said Monday that China’s currency, the yuan, is a candidate for revaluation, a move that would also give more scope to contain domestic inflation in the overheated economy.
In its annual report, the BIS acknowledged that Chinese authorities have legitimate concerns regarding how a currency revaluation could affect the overall health of its financial system. However, those concerns could be better dealt with through domestic policies, said the report.
“Greater exchange-rate flexibility would help curb the massive capital inflows that are contributing to the growing imbalances that threaten the sustainability of China’s long expansion,” the report said.
Since 1995, the Chinese currency has been pegged to the dollar at a rate of 8.28 yuan to one dollar. With the sharp increase in China’s trade surplus with the U.S., Beijing has come under increased pressure from the Bush administration and domestic U.S. manufacturers to revalue its currency to remove what is perceived as an unfair competitive advantage. Chinese monetary authorities, noted the report, “have continued to accumulate sizable amounts of dollar reserves in their attempt to preserve the fixed rate vis-a-vis the U.S. currency.”
In February, China’s exchange reserves stood at $642.6 billion and last year increased by $206.7 billion, it said.
On the outlook for the world economy, Nouk Wellink, BIS president, told representatives from more than 100 central banks that “near-term prospects appear, on balance, good” for further robust growth.
The BIS projects the global economy this year to grow by 4 percent, slightly below last year’s 5 percent expansion, with the U.S. and emerging Asian economies — spearheaded by China and India — the principal locomotives. The U.S. is forecast to grow by 3.4 percent in 2005, while China, which expanded by 9.5 percent in the first quarter of 2005, is expected to grow by 8.9 percent, or a fraction below last year’s 9.5 percent increase. India is expected to sustain last year’s increase of 7.1 percent.
Despite efforts by Chinese authorities to slow down the economy, the BIS points out that in 2004 “the ratio of nominal fixed asset investment to GDP increased further from 47 percent in 2003 to 51 percent in 2004 and investments in some overheated sectors like real estate continued apace.”
The BIS said Chinese exports have remained strong and added the abolition of quotas on Jan. 1 has “provided a further boost to the exports of major Asian economies, especially China.”
Given China’s and India’s “cost and productivity advantages,” the BIS anticipates the two large Asian nations will increase their share of exports in the sector “putting pressure on other textile exporting countries to adjust.”
BIS economists also noted that globalization and the impact of “massive increases in the supply of manufactured goods, especially from China … have resulted in prices of traded goods falling for almost a decade.”
The report outlined that greater cross-border labor mobility and movement of factories to lower-cost jurisdictions have kept a cap on wages and intensified downward pressure on prices.
“The emphasis has been on cost-cutting. Supermarkets … and others directly serving consumers have been putting relentless pressure on global suppliers to provide more for less.”