SHANGHAI, Oct 12: US Treasury Secretary John Snow opened his tour of China on Wednesday focused on the steps the country has taken to greater currency flexibility since Beijing revalued the yuan and pledged greater forex reform.
Snow kicked off his visit in China’s financial hub of Shanghai with a tour of the China Foreign Exchange Trading Centre (CFETS), a subsidiary of the central bank, where current forex trades are executed, as will be eventual derivatives contracts.
China’s progress in new forex-based financial instruments is of particular interest to Mr Snow and US officials as it helps gauge how rapidly China is moving towards its long-stated goal of a fully convertible currency system.
“It was a good discussion on the nature of the platform, how it’s been operating since the move in July to widen the (forex trading) bands, its capability of handling further flexibility, where we where assured that the platform would be capable,” Mr Snow told reporters before visiting the Shanghai Stock Exchange.
The CEFTS is still in the midst of developing new derivative instruments to manage interest and exchange rate fluctuations, which officials have insisted are crucial to further changes to the restricted currency regime.
Beijing took a small but key step towards freeing up the currency in July when it scrapped the yuan’s effective peg to the dollar and placed it in a tightly managed basket of the currencies of its major trading partners, notably the US, the EU and Japan.
Since the initial 2.1 per cent revaluation the yuan has appreciated 0.27 per cent after closing on Tuesday at 8.0879 per dollar, a race which has been criticized by some trading partners, including the US, as way too slow.
“It’s clear that the CEFTS is moving forward with a lot of work for trading products for (yuan) bonds, for derivates on the currency, for forwards and options (contracts) on the currency,” said Mr Snow.
In Tokyo on Tuesday, Mr Snow insisted more needed to be done on yuan flexibility. Washington complains that the yuan remains undervalued against the dollar at the cost of millions of US jobs lost to cheap Chinese imports.
“We are anxious to see the Chinese fulfil the commitment they made (in July) to allow market forces play a larger role in setting the value of their exchange rate over time,” Mr Snow said in Tokyo.
“We’d like to see China continue on that path and see more flexibility.”
Washington was not alone in its desire to see Beijing embrace greater currency reform, Mr Snow said, noting that the Group of Seven industrialized nations had also called for such measures.
“It’s a view that’s articulated because greater flexibility is genuinely in the interest of China. It will also lead to better results for the global economy,” Mr Snow said.
In Shanghai, Mr Snow also spoke with members of Shanghai’s American business community, addressing finance and banking CEOs at breakfast.
The US administration and financial leaders are keen to see China build a more robust financial system by better extending credit options to the consumer, thereby stimulating domestic demand while easing the country’s reliance on exports.
People’s Bank of China chief Zhou Xiaochuan said separately that China had to boost domestic consumption to reduce the country’s dependence on exports and so alleviate currency appreciation pressure.
“The best measure to reduce China’s trade surplus is to encourage China’s domestic consumption,” Zhou said in remarks published Wednesday in the Shanghai Securities Journal.
“Otherwise, in two or three years’ time, once domestic consumption loses steam, there will then be a lot of pressure around issues such as the (Chinese currency) exchange rate and trade friction, which will be ‘politicized’,” Zhou said.
Zhou’s remarks come ahead of a weekend Group of 20 meeting near Beijing and bilateral talks which will also be attended by Mr Snow and US Federal Reserve Chairman Alan Greenspan.—AFP