China at "rare" moment for reforms: central bank report

18 April 2012 09:43 am - 0     - {{hitsCtrl.values.hits}}

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China is at a promising moment for speeding up interest rate and exchange rate reforms, the central bank's statistics department said in a report published Tuesday, following the latest move to make the Chinese currency more flexible.

China widened the daily band in which its currency may trade and allowed banks to short sell a limited amount of U.S. dollars [ID:nL3E8FG8IA].

"The current time represents a rare strategic moment to speed up capital account opening," said the report, published in the China Securities Journal.

It said this was because ample foreign exchange reserves and progress in internationalizing the yuan are helping Chinese companies invest overseas as they look to escape over-capacity at home. They have space to do so because of the contraction in global investment by Western companies and funds, it added.

"The yuan is not far from becoming an international reserve currency," the report said.

The report dismissed the idea that introducing more flexibility to the Chinese currency would attract inflows of hot money that the government would find difficult to control.

"As a big country, our interest rate and exchange rate are not decided by international capital flows. Interest rates are decided by domestic economic and financial conditions, the exchange rate is primarily determined by trade conditions with other countries," the report said.

China's banks have rolled out wealth management products that pose a challenge to Beijing's grip on interest rates.

Such wealth products yield returns that are well above the benchmark interest rates. For example, some banks in Beijing offer 4.7-4.8 percent annual return for 100-day products compared to the one-year deposit rate of 3.5 percent.

Many reformers in China and overseas economists have argued that China's future economic growth depends on politically unpalatable reforms, including liberalizing the currency and the state-set interest rates that guarantee profits for state-run banks and distort the lending market.

But the Chinese government and ruling Communist Party have been reluctant to give up such a powerful policy tool.

(Reporting by Lucy Hornby and Zhou Xin; Editing by Kevin Yao and Joseph Radford)

(Reuters)
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