China to need more RMB flexibility as dollar moves

WASHINGTON, Apr 23 (Reuters) China should increase flexibility to prevent its renminbi currency from moving downward with the dollar in the event the U.S. currency depreciates, David Burton, the International Monetary Fund's director for Asia, said on Sunday.

China ''certainly made a start'' with the exchange rate flexibility it introduced with reforms last July, Burton told Reuters. ''But the flexibility so far has been relatively limited and there is scope for them to do more,'' he added.

Burton said that the dollar had appreciated for much of the time since July when Beijing abandoned a long-standing policy of pegging the value of the renminbi to the dollar, and tied its unit to a basket of currencies.

''If the dollar were to weaken ... it wouldn't be appropriate for the renminbi to depreciate with the dollar,'' he said in an interview.

A weaker dollar would ''make it all the more important for the renminbi to show flexibility vis-a-vis the dollar to prevent it from depreciating in real effective terms.'' Burton said that growth in Asia as a whole would remain ''pretty robust'' at close to 7 percent this year, thanks to solid fundamentals such as high savings, high investment, good productivity growth and an entrepreneurial work force.

In Japan, forecast to grow 2.8 percent this year, Burton said ''the foundations for the recovery are good but it will slow a bit to a more sustainable pace next year.'' Asia's surprising resilience in the face of surging oil prices this year was due in part to the fact that ''some of the Asian currencies have appreciated a bit against the dollar,'' he said.

CHINA STICKS TO GRADUALISM Finance officials from the Group of Seven countries -- the United States, Britain, Canada, France, Germany, Italy and Japan -- departed from recent practice and specifically pointed at China in a communique on Friday as a country that ''especially'' needed more foreign exchange flexibility.

Asked about the G7 statement, the head of China's central bank said on Saturday that China would still pursue gradualism even though the yuan currency could ''probably'' begin to rise more swiftly in the wake of the July 2005 reforms.

''I think that right now the speed of moving forward (toward greater foreign exchange flexibility) ... is OK. It's good for China,'' People's Bank of China Governor Zhou Xiaochuan told a small group of reporters.

Burton said that following the reforms, China's currency remained ''fairly tightly linked to the dollar'', leading to far greater appreciation against other currencies in the basket than against the U.S. currency.

''Going forward, they may need to pay more attention to the reference basket if they are to avoid depreciating in real effective terms,'' he said.

As part of international efforts to address imbalances, China has ''quite a lot of scope to stimulate domestic demand'' through reforms of the financial sector, the health care system, the social safety net and education, Burton said.

''There is a need to shift from investment and net exports, to consumption,'' he said, noting that China's first-quarter economic data showed potentially worrying high rates of growth in investment, credit creation and banking liquidity.

''There is a bit of a concern,'' he said. ''It doesn't necessarily turn into inflation in a hurry, but it does create other problems,'' such as excess capacity and nonperforming loans.

Reuters OM DB0122