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Asia Economy Last Updated: Oct 19, 2010 - 9:06:53 AM

China to continue with gradual exchange rate reforms says chief currency regulator
By Finfacts Team
Oct 19, 2010 - 12:54:07 AM

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Governor of the People’s Bank of China, Zhou Xiaochuan and IMF Managing Director Strauss-Kahn at the Macro-Prudential Policies—an Asian Perspective conference, Oct 18, 2010, Shanghai, China.

China will continue to promote gradual exchange rate reforms, even while the yuan is expected to stabilize at a reasonable level, said Yi Gang, head of the State Administration of Foreign Exchange (SAFE) Monday in Shanghai.

Yi, also deputy governor of the People's Bank of China (PBOC), the central bank, made the remarks at a seminar held by the International Monetary Fund (IMF) to discuss the theme "Macro-Prudential Policies -- an Asian Perspective".

"The flexibility of the yuan has increased since China launched exchange rate reforms in June. We will further boost those reforms, but the process will be gradual," Yi said.

"Judging from the markets, the yuan can remain stable at a reasonable and balanced level," he said.

China will also continue to expand domestic demand and boost construction in rural medical services, education and infrastructure, he said.

Five years ago, China abandoned a decade-old peg to the US dollar and allowed its currency to fluctuate against a basket of currencies and appreciate by 2.1%.

Since then, the yuan has strengthened further, albeit slowly, and has risen more than 21% against the US currency.

Excessive volatility in the exchange rates could harm global economy, the head of the Eurogroup of Eurozone finance ministers, said on Monday after the euro touched a nearly nine-month high against the US dollar recently.

"We did talk about exchange rate situation," Luxembourg Prime Minister Jean-Claude Juncker said after chairing a monthly meeting of the finance ministers. "It is important that exchange rates should reflect economic fundamentals."  

In Shanghai, central bankers and other senior financial officials from around the world discussed in Shanghai ways of reinforcing the stability of a global banking and financial system still vulnerable to the shocks that triggered the recent international financial and economic crisis.

Calling for continued global cooperation, Dominique Strauss-Kahn, Managing Director of the International Monetary Fund (IMF) said Asia was leading the world recovery after the recession, but fixing the fragilities of the international financial system remained a top priority.

How to prevent another systemic breakdown—when financial sector problems can spread rapidly and infect the real economy and jobs—was the topic of a high-level conference in Shanghai on October 18. Senior central bank officials from Asia, Europe, North and South America, and Africa came together in Shanghai to debate the issue. 

The conference on “Macro-Prudential Policies: Asian Perspectives” was sponsored by the IMF and hosted by the People’s Bank of China (PBC). Lead speakers included the Governor of the People’s Bank of China, Zhou Xiaochuan, IMF Managing Director Strauss-Kahn, IMF First Deputy Managing Director John Lipsky, and as mentioned above, PBC Deputy Governor Yi Gang.

Participants from about 25 countries attended the closed-door meeting, and included central bank governors and deputy governors, along with other senior policymakers and regulators.

Importance of policy coordination

The Shanghai conference served to underscore the importance of dialogue and policy coordination linking the advanced economies, emerging market economies, and developing economies. “The great challenges of today all require a cooperative solution—especially if we are to achieve strong, sustainable, and balanced global growth in the years ahead,” said Strauss-Kahn in his keynote address.

Speaking at a closing press conference, PBC Deputy Governor Yi Gang added that the the conference had reached an “important consensus” on international cooperation in ensuring strong macro-prudential policies, because systemic risks “are very likely to spread over borders.” He also pointed to consensus on the need to have clear lines of responsibility in addressing macro-prudential issues--especially in the area of information gathering  -- and the need to foster close cooperation between central banks and other national regulators.

One key purpose of the Shanghai conference was to integrate the lessons learned from the financial turmoil of the global crisis. “This is directly related to today’s conference, which has reflected months of hard work by PBC and IMF staff,” IMF officials said. “Future growth must be safer growth, less prone to financial excess and the build-up of macroeconomic imbalances. So financial sector and macro-prudential policies are like the glue that holds the system in place.”

Range of risks

During the crisis, troubles in one institution quickly spread—leaping across national borders - - to threaten the whole complex web of financial relationships. The global crisis showed that simply looking at the safety and soundness of individual financial institutions in isolation is not sufficient; supervisors need to be aware of and respond to a range of systemic risks—and to understand clearly where responsibility lies for addressing those risks.

Another lesson was that policymakers need to avoid complacency in the face of asset price and credit booms. “Clearly, conventional macroeconomic policies and macro-prudential tools are intrinsically linked, just as price stability and financial stability are intrinsically linked,” Strauss-Kahn said. “We need a holistic approach, which means a changing role for central banks in the years ahead.”

The Shanghai conference addressed a range of issues related to macro-prudential policies  -- meaning policies that focus on the financial system as a whole and attempt to limit system-wide distress through regulation and better supervision.

The conference sought to define the institutional contours of a new macro-prudential policy framework, and the range of tools that could be applied to mitigate systemic risk and limit procyclicality, including regulatory norms and taxes.

Officials discussed country experiences - - including from within the Asian region - -  with a particular emphasis on the interaction of macro-prudential policies and capital flows.

They also discussed the implications of a macro-prudential approach for central bank policies.

“This is a time of rather great anxiety with respect to currency movements,” David Schmittlein, dean of MIT Sloan School of Management, told CNBC:

Asia rising

At the same time, the conference was intended to highlight the growing importance of Asia in the global policy discussion, especially as the region’s policymakers are taking important steps in the post-crisis period to implement macro-prudential measures to strengthen the system.

The Shanghai conference followed a major gathering in July 2010 in Daejeon, South Korea, that is claimed to have  marked a new stage in the Fund’s relationship with the region. The Daejeon conference brought a consensus for a stronger IMF role in Asia, with the Fund making its analysis more useful to Asian policymakers, strengthening the global financial safety net, and enhancing Asia’s voice in the global economy.

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