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Foreign Banks Support Stable Renminbi Policy

China is right to resist international pressure to revalue its currency because a stable renminbi is key to both international and domestic growth, two overseas banks concluded in recently published reports.

There is no need for a significant appreciation of the renminbi at the current stage as China is vital as a contributor to world growth and as a locomotive for regional demand in Asia at the current exchange rate, Standard Chartered Bank said in a report released on Monday.

China has been under pressure from the United States, Japan and South Korea to revalue the renminbi due to the country's growing trade surplus.

Last year, China exported goods worth US$325.6 billion while its import volume reached US$281.2 billion.

"The fact that China enjoys a trade surplus does not tell the full story," Gerard Lyons, chief economist of Standard Chartered Bank, wrote in his report.

Because imports and exports are both soaring, it is possible for China to both enjoy a trade surplus and still provide a much-needed boost to neighboring countries, he argued.

China's imports have more than doubled over the past five years, from US$136.9 billion in 1998 to US$281.2 billion last year.

China should only revalue its currency if inflation becomes a problem, the bank stated. While the country's money supply has grown rapidly, its inflation rate is still relatively low.

"There are some who see this as a sign of inflation pressures building up in China," said Lyons. "But we don't.

"Certainly, there is property price inflation in some urban areas, but this is an issue not best solved by stronger exchange rates."

"This year, and next, we forecast minimal inflation of less than 1 percent for an economy growing strongly," the bank's report stated.

The report echoes conclusions reached by the Hong Kong and Shanghai Banking Corp Ltd in a study it released last week.

"For developed countries the call on the renminbi to appreciate is largely based on political motivation rather than serious economic concern," said the HSBC in its China Monthly Report.

Chinese goods are still largely complementary and do not directly compete with products made in developed countries, said the report.

The People's Bank of China, the Chinese central bank, said last month that the present exchange rate is appropriate.

Many economists expect China, as the world's fastest growing economy, will eventually have to revalue the renminbi.

Tai Hui, an economist for Standard Chartered Bank North East Asia, said that China may try to ease pres-sure on the renminbi by allowing more capital outflows over the next six months.

"China could stop subsidies to exporters and this would ease the trade surplus," said Hui. "In addition, Chinese exporters could also be allowed to retain a small, but significant, proportion of their foreign currency export earnings offshore."

(Shanghai Daily August 20, 2003)

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