June 28, 2005

Fixed yuan ‘legitimate choice’-World Bank director

By Lesley Wroughton

WASHINGTON (Reuters) - The World Bank's director for Chinasaid on Tuesday Beijing's fixed exchange rate policy was a"legitimate choice" and not a manipulation of the yuancurrency, despite escalating rhetoric from Washington.

"I don't agree with any of the criticisms of China that itis manipulating its exchange rate," David Dollar told a meetingof the Washington-based Center for Global Development.

"My own preference would be to move to a more flexibleexchange rate system (but) it is a very difficult thing tomanage and lots of developing countries have had financialcrises as they have made this transition, so I respect the factthat the Chinese authorities are cautious," he added.

The Bush administration has been pushing for a revaluationof the yuan, which has been pegged at 8.28 to the dollar formore than 10 years -- a level U.S. exporters and many lawmakerscomplain keeps China's goods unfairly cheap.

The Treasury Department last month warned that China riskedbeing branded a manipulative trading partner if it did not takesignificant action on its currency in the next few months.

The World Bank's Dollar, who is based in Beijing, saidloosening the yuan's peg to the U.S. dollar did not necessarilymean the Chinese currency would stay strong over the long run.

"It is a toss-up which way it will go ... I wouldn't assumethat if they make it more flexible that the (long-term)tendency is going to be toward appreciation."

He said the more pressing issue for China was to shift itseconomic focus to growing domestic demand, rather than relyingon investment- and export-led growth.

"The export orientation has been a very good strategy forChina but it has its limitations. And for China to continue togrow rapidly it will need to rely more on domesticconsumption," he said.

China's exports have climbed at a 20 to 30 percent annualclip, well ahead of world trade growth rates of just 6 to 8percent, Dollar noted.

The transition to a domestically driven economy carriesrisks, but these would be mitigated by a more flexible yuan,reform of state-owned commercial banks and more developedpension and health insurance systems, he said.

If China's institutions do not become more sophisticated tosupport such a shift, "we will definitely see a period in whichChina's growth slows down quite significantly," Dollar said.

He said prospects were "good" for China's economy to keepgrowing in the 6 to 7 percent range, as the Chinese labor forcemoves from farming to urban employment.

The Chinese government has projected that some 300 millionpeople will migrate from rural areas of China to cities overthe next 15 to 20 years -- equivalent to rural-urban migrationof Europe over 200 years.