China promises to keep exchange rate steady

[February 18, 2009]  BEIJING (AP) -- China promised Wednesday to keep its exchange rate stable and said it would use part of its $1.95 trillion in foreign currency reserves to boost imports and consumer spending to combat the global financial crisis.

Chinese exporters that face plunging sales want the yuan devalued, which would make their goods cheaper abroad. But economists say they see no sign Beijing will take such a step, which could fuel tensions with its trading partners.

"We will maintain the basic stability of the renminbi exchange rate at a reasonable and balanced level," a deputy administrator of China's foreign exchange regulator, Deng Xianhong, said at a news conference, referring to the currency by its official name.

"The important thing is to prevent the exchange rate from making big fluctuations," he said. "This will not only be good for China and the world but also will be good for tackling the international financial crisis."

The yuan was allowed to rise by about 21 percent against the U.S. dollar from mid-2005 until mid-2008 in government-controlled trading, but it has held steady since July at about 6.85 to the dollar.

Economists say a weaker yuan would do little to boost Chinese exports because demand abroad is too weak. They say a devaluation could cause serious repercussions, triggering a round of similar moves by other exporters and straining global trade relations at a time when coordinated action is needed to revive trade and finance flows.

Beijing also is looking at how to use its foreign reserves in its effort to boost consumer spending and imports, said Fang Shangpu, another deputy administrator of the agency, the State Administration of Foreign Exchange.

"We will step up support for the government's policy of increasing imports and boosting domestic demand," said Fang.

He gave no details, but said the agency also will ease access to financing for "enterprises that are going to make outward investment."

The government's 4 trillion yuan ($586 billion) stimulus plan is meant to shield China from the global slump by reducing reliance on exports through efforts to boost domestic consumption. It calls for injecting money into the economy through higher spending on public works in hopes it will make its way to consumers' pockets.

China's imports fell by 43 percent in January from a year earlier as demand for Chinese goods weakened and factories bought less foreign raw materials. It was a serious blow for the country's trading partners.

China's reserves, the world's largest, rose by $417.8 billion over the course of 2008 but the growth slowed sharply toward the end of the year.

Deng said some foreign companies were pulling money out of China due to financial demands elsewhere amid the global crisis. But he said the capital outflow was "very limited" and the government had the capacity to cope with it.

"It does not mean they have lost confidence in China," Deng said. "The Chinese economy remains an attractive place to invest."

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On the Net:

State Administration of Foreign Exchange (in Chinese): http://www.safe.gov.cn/

[Associated Press; By JOE McDONALD]

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