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PRC spends US$195 billion to keep yuan peg, press says

Central bank seen facing pressure on management of money flow

PRC spends US$195 billion to keep yuan peg, press says

China's central bank spent 1.61 trillion yuan (US$195 billion) buying foreign currency last year to maintain the yuan's peg with the dollar, a rise of 40 percent over 2003, state press reported yesterday.
The People's Bank of China also drained 669 billion yuan from the banking system via open market operations last year, more than double the 282 billion yuan used in 2003, Xinhua news agency said citing a central bank report.
"The central bank faces comparatively large pressure on the management of money flow and currency control," it said.
Unfair advantage
China keeps its currency pegged to the U.S. unit in a very narrow trading bank of about 8.28 yuan, a level which trading partners, especially the United States, say gives Chinese exports an unfair advantage.
The government is not only under political pressure to let its currency appreciate but the central bank is struggling to mop up the extra cash in the system flowing in on speculative bets that it will free up the peg.
China has resisted foreign pressure to loosen the yuan peg but has promised that it will move over time towards a more flexible exchange rate regime.
Soaring foreign reserves
Balloning trade surpluses and years of foreign investment have flooded the financial system with cash and market players say the central bank has been virtually the only buyer of surplus hard currency such as the dollar.
As a result, China's foreign reserves in 2004 soared to a record 609.9 billion from US$403.3 billion in 2003, with the increase equal to the total intervention amount.
Meanwhile, China's US$60 billion current account surplus, up US$25 billion from 2003, and US$61 billion of foreign direct investment, were additional large sources of foreign exchange, ING economist Tim Condon said in a note.
This still leaves US$74 billion (614 billion yuan) of non-FDI capital flows, coincidentally roughly the same amount as the central bank drained from the system through its open market operations.
Monetary management issue
"This is the monetary management issue that we believe will motivate the authorities to reform their exchange rate regime by introducing greater two-way risk some time in the second quarter of 2005," Condon said.
In attempt to ease pressure on the currency, China will cut its growing balance of payments surplus by permitting more foreign currency to leave the country, state media reported earlier this week.


Updated : 2021-10-28 10:12 GMT+08:00