China�s Hu Jintao: Currency system is �product of past�

BBC News (Link) (January 17, 2011)

Chinese President Hu Jintao has said the international currency system dominated by the US dollar is a �product of the past.�

Mr Hu also said China was taking steps to replace it with the yuan, its own currency, but acknowledged that would be a �fairly long process.�

The remarks to two US newspapers come ahead of a state visit by the Chinese leader to Washington this week.

They reflect continuing tensions over currency issues between the two powers.

The remarks to the Washington Post and Wall Street Journal came in the form of written responses to questions. Mr Hu also reiterated criticism of a decision by the US Federal Reserve to inject $600bn into the economy, which some argue will weaken the dollar at the expense of other countries� exports.

�The monetary policy of the United States has a major impact on global liquidity and capital flows and therefore, the liquidity of the US dollar should be kept at a reasonable and stable level,� President Hu said.

�Important contribution�

Meanwhile, he disagreed with suggestions that letting the yuan appreciate in value would help China to combat inflation.

He said inflation, which reached 5.1% in November - its highest level in 28 months - was �on the whole moderate and controllable.�

�We have the confidence, conditions and ability to stabilise the overall price level,� he said.

Beijing has previously come under pressure over its currency from the US, which has accused China of manipulating the yuan to help boost Chinese exports.

On Sunday night, three Democratic senators announced they would introduce a new bill to increase penalties the US considers to be �currency manipulators.�

However, the move is unlikely to receive support from senior Republicans - who recently took control of the House of Representatives.

The new House speaker, John Boehner, voted against another bill that failed last year that would have helped US companies challenge currency subsidies.

Currency reservations

Despite criticism of the current system, Mr Hu said he believed it would be a long time before the yuan - or renminbi (RMB) - was accepted as a global currency.

�China has made important contribution to the world economy in terms of total economic output and trade, and the RMB has played a role in the world economic development,� he said.

�But making the RMB an international currency will be a fairly long process.�

Some economists suggest that China�s growth strategy - with its focus on exports and state-led investment - may be incompatible with Mr Hu�s currency ambitions.

In order for the yuan to oust the dollar as a global reserve currency, international central banks and investors would need to be able to get their hands on huge amounts of the currency.

Yet neither of the ways in which China could supply the world with more yuan is at all appealing to Beijing, according to Michael Pettis, economist at Beijing University.

He says the country could start running big trade deficits with the rest of the world - just as the US has been doing - and finance them by selling their currency to their trade partners.

Or it could allow foreign investors to pour their money into Chinese financial assets - like shares, bonds or yuan bank accounts - matched by similar Chinese investments in the rest of the world.

But Mr Pettis warns that for the numbers to add up, China would need to do these things on an unprecedented scale, which is likely to be unpalatable to the authorities.

Either of these moves is likely to go with an increase in the yuan�s value, making Chinese exporters less competitive.

And they may also fuel speculative asset bubbles in China - something that Beijing has been trying to clamp down on of late. �