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Last Updated: Thursday, 22 April, 2004, 12:52 GMT 13:52 UK
China signals a yuan peg U-turn
Chinese yuan
Beijing is looking closely at how to ditch the tight exchange rate
China may loosen its exchange rate system, the official in charge of running the policy has said.

China's leaders have resisted pressure from the US, IMF and the G7 wealthy nations to end the yuan's peg to the dollar, until now.

"We don't think the fixed system is good. We think that a floating system is good," said Guo Shuqing in an interview with the Financial Times.

The peg - at 8.28 to the dollar - keeps China's exports cheap on world markets.

Mr Guo is director general of the State Administration of Foreign Exchange, and deputy governor of the central bank, the People's Bank of China.

China's U-turn

The Bush Administration blames the currency peg for contributing to the loss of nearly 3 million US industrial jobs during the past four years.

Republicans and Democrats have stressed the issue as they slug it out to win the White House in November's presidential election.

China's leaders, including President Hu Jintao, have rejected the accusation that the currency peg is unfair, stressing the need for stability.

However, Beijing agreed to send a team to the US to study the technical aspects of a policy shift last autumn, and state newspapers have carried stories saying that officials were studying the pros and cons of a change.

But it remains unclear if Beijing was seriously investigating a new policy or merely seeking to defuse pressure.

Clear signal

Mr Guo said that his staff had done a lot of research on the likely impact of switching to a basket of currencies, suggesting it was the most likely choice.

"In the past we had such a system. The floating system will also have some reference to a basket."

He gave no time scale for introducing the switch, the FT reported.

A basket system would appear to rule out Washington's demand for the yuan to float freely.

Mr Guo said it was not clear if the yuan was undervalued, indicating that the currency would not necessarily appreciate when it is allowed to fluctuate more freely, the newspaper said.

China's foreign exchange reserves rank among the largest in the world, at $440bn (248bn).

Speculative capital has poured into China, averaging $12bn a month in the first quarter of 2004, as currency traders have bet on a yuan revaluation.

But inflows appear to be slowing as the global economy picks up.

US political rhetoric about China's currency has also eased as the weakening dollar has boosted US exports. The topic played a relatively low key role at US-China trade talks in Washington this week.

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