TOKYO, March 30: China’s central bank governor indicated the yuan would not become much stronger in the near future but may weaken as Beijing is adopting a more flexible currency system.

Giving a lecture to Japanese bankers, People’s Bank of China governor Dai Xianglong noted the yuan rose against the dollar only by five percent over the past seven years.

Beijing’s strict cap on foreign reserves held by companies and on overseas corporate investment by Chinese entities meant the wider economy is awash with foreign currency for which there is little demand, he said.

If we ease these regulations, we will not be able to raise the rate of the yuan so much, he said, as it would entail increased demand for foreign denominations.

At present, companies that reach the foreign reserve cap are obliged to sell the money to the central bank for yuan.

There also is the possibility that changes in the (Chinese) current account balance will widen in accordance with changes in trade and investment since we joined the World Trade Organization (WTO), in an apparent reference to the possibility of China running a current account deficit.

China now has a trade surplus but some analysts predict it will turn into a deficit in the future as Chinese markets are opened to imports following the country’s accession to the WTO.

The IMF (International Monetary Fund) has proposed linking the yuan to a basket of currencies of its major trade partners rather than to the dollar to shift from a relatively fixed rate to more flexible rates, Dai said.

We want to consider proposals like this seriously, he said, adding Beijing was ready to make efforts to make the nation more able to cope with economic changes stemming from WTO entry.

Asked to comment on the view that the yuan is too low, Dai said: Japanese friends are very interested in this matter and I want to exchange opinions frankly.

The governor said currency rates are normally determined by the supply and demand balance in markets although they are closely linked to purchasing power, but market forces did not operate unfettered in China.

Under market rules, the yuan has to appreciate, but the important point is that the foreign exchange system is under control in China, he said.

Real market situations are not totally reflected on the rates, he said, noting the yuan “will not appreciate” if Beijing allows companies and people to hold more foreign currency.—AFP