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US Must Grasp Reality of China Forex Policy
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United States senators Charles Schumer and Lindsey Graham are in China to obtain first-hand knowledge about China's foreign exchange policy.

Such a fact-finding trip may help the two develop a better understanding of the Chinese approach to dealing with the renminbi issue, the rationale behind it, and the country's foreign trade policy.

The two have become well-known figures here for their claim that China has been manipulating the value of its currency to gain a competitive edge for its exports.

That conclusion, however, was unfair in Chinese eyes. Many people here believe it was the result of lack of understanding about our philosophy and practice.

In July, China revalued the yuan, scrapped its link with the US dollar and began to use a basket of currencies as reference for the yuan's value.

Premier Wen Jiabao said eight days ago that the range for the yuan's fluctuation would be widen. But there will not be a one-off revaluation like the one in July, he said.

Chinese policy-makers are well aware that a more flexible foreign exchange system is an indispensable part of a market-based economic system.

But they also argue that the progress of foreign exchange reform should be in line with economic fundamentals and adaptability of Chinese enterprises, especially those in the financial sector.

Financial reform planners are wary of radical steps because they would certainly cause negative shocks to Chinese firms, the Chinese economy and the region.

It takes time to lift restrictions on capital flow one-by-one. It takes time to introduce risk-hedging tools, which are necessary for managing a more flexible currency.

Chinese companies also need time to learn to employ the tools and adapt to the new environment.

An incremental approach is one of the underlying reasons for China's generally successful economic reform during the past decades.

When it comes to foreign exchange, this approach should continue.

After the July reform, market forces have been allowed to play a bigger role in determining the rate of the yuan. Room was left for further changes of the yuan's value, either upward or downward.

Since then, the yuan has gained more than 1 percent.

In this regard, steady progress towards a more market-based foreign exchange system that suits the country's economic needs is the best approach. There is no hidden agenda such as the pursuit of a big trade surplus.

It is natural that China, as a member of the World Trade Organization, participates in global trade.

However, for an economy the size of China, domestic consumption should be the prime force propelling growth.

Currently, in every official document about growth strategy, stimulating domestic demand is a top priority.

For years, China and the United States have bickered over the size of China's trade surplus.

Chinese economists side with many overseas peers in their belief that the underlying cause for the US trade deficit was its own flawed policies.

While the United States focused on bilateral imbalance, China urged it to observe the issue from the global trade perspective, which would make the imbalance seem less severe.

They also want to remind the Americans that they had neglected US surplus in services trade, which would offset part of its deficit in trade of goods. The US also counts some entrepot trade as trade with China, which results in much larger trade imbalance statistics than those coming from Chinese customs.

It is unlikely that the differences will be settled during the visit of the two senators.

But it is a good opportunity for the Chinese hosts to say this again: US restrictions on some high-tech imports to China are unnecessary. Lifting these restrictions would greatly help American exporters no matter how one calculates the trade figures.

(China Daily March 23, 2006)


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