In the interview, Li also said the central bank has not embarked upon a course of steadily increasing interest rates, as the U.S. Federal Reserve has done, to cool inflationary pressures in its fast-growing economy, especially in the commercial real estate sector. The bank raised its benchmark lending and deposit rates last month for the first time in nine years. Li said that increase has been effective, citing projections showing that inflation for the year will probably slow to around 4 percent from more than 5 percent and that growth in investment in fixed assets has slowed.
"So far, so good," Li said. "If the situation remains stable, there will be no need to take further action."
A teller at a Bank of China branch counts 100-yuan notes. The yuan has been fixed at a rate of about 8.3 per dollar since 1995.
(Claro Cortes Iv -- Reuters)
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Global financial markets had taken the Chinese rate increase as a sign the government was embracing more of a market approach, rather than government fiat, to manage China's economy. Some contended that augured well for China to act soon on its currency.
Li dismissed the argument that China's government is keeping the yuan artificially low to build its trade surplus with the United States, which hit a record $15.5 billion in September. Instead, he reiterated the Chinese view that substantial challenges need to be met before China could float its currency. These include further progress on bank reform, establishment of a market to hedge risks from a floating currency, and investor education for institutions that would trade on that market.
"We cross the river by touching upon stones," Li said. "We don't know how deep the water is. We have to move cautiously."
Although the Chinese economy is huge and its exports enormous, market mechanisms that exist in other countries with economies of similar size are still in their infancy here. Most companies still get the majority of their funding from state-owned commercial banks and many don't pay that money back, leaving the banks in a precarious state, relying heavily on the government's backing. The stock market is still more of a place for short-term bets than long-term investing, and few individuals have enough confidence to put their money in it. The corporate bond market is tiny; Li noted that there are no independent firms established to rate corporate creditworthiness.
Li focused primarily on the risks to the nation's banks from a free-floating currency. "The staffs working at the banks are not familiar with risk," he said. "There are no hedging instruments. Very few can deal with this. They don't even know the concept."
Still, Li said, a more flexible currency is in China's interests. "The economy of China is huge," he said. "We have to have an independent monetary policy. The question is how long it takes for us to move in that direction."
Controversy over the issue flared in Washington yesterday. The administration rejected a petition by 22 House members and eight senators seeking a World Trade Organization complaint against China's currency policy. The administration has contended that such a case would probably fail and prove counterproductive.
The decision was protested in a letter from Sen. Charles E. Schumer (D-N.Y.) and Rep. Sander M. Levin (D-Mich.), who told U.S. Trade Representative Robert B. Zoellick that "failure to act on China's currency manipulation . . . means that America's farmers, workers and businesses will continue to suffer a massive and unfair competitive disadvantage."
Rebutting such criticism, Li pointed out that the U.S. government was imploring China to maintain its fixed exchange rate during the Asian financial crisis of the late 1990s, when the currencies of many neighboring countries were plunging. Beijing "suffered a lot" by keeping its currency stable, "but the world requested it," he said. "No people mention this when they ask to let the [yuan] float."
Staff writer Paul Blustein contributed to this report from Washington.
