Happy days ahead?

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Happy days ahead?

ตั้งหัวข้อ  sunny on Sun Jul 25, 2010 12:03 pm

Policy implications of the global recovery for India

July 25th, 2010
Author: Suman Bery, NCAER

The Business Standard editorial ‘The IMF gets more upbeat’ noted that the IMF has had a patchy record in charting the evolution of the present crisis, following developments more than anticipating them. Despite this performance, and its poor performance in predicting the crisis, each update of its forecast for the global economy (the World Economic Outlook, or WEO) receives considerable international press attention and commentary.




While the Fund’s full analysis of the global economy is undertaken twice a year — in April and September at the time of the meetings of the governors (i.e. finance ministers) of the IMF and the World Bank — the organisation also undertakes summary intermediate revisions. One such forecast was unveiled in the World Economic Outlook Update, July 8, 2010. Before examining the implications of this forecast for Indian policy, particularly the quarterly monetary policy update due at the end of July, it is worth reflecting briefly on the context in which this latest forecast has been prepared.

Unusually, the release occurred in Hong Kong, China. It was timed for the eve of a major gathering of Asian policy-makers to take place in Seoul, Korea on the joint invitation of the Korean government and the IMF. Both events signal the increased importance of Asia in the global economy. They also indicate the desire of the IMF to reconnect with a group of countries which it alienated through its response to the Asian crisis of 1997.

With the notable exception of Pakistan, these Asian countries (ASEAN, China, India, and the ‘old’ newly industrialised economies of Singapore, Taiwan and South Korea) are unlikely to return to the Fund for resources any time soon. Instead they have spent the past decade ‘self-insuring’ against an unpredictable global financial system through a large build-up of foreign exchange reserves. Under Chinese and Japanese leadership, within the framework of a mechanism of swap arrangements referred to as the Chiang Mai Initiative (CMI), the underlying agenda has, in fact, been to develop alternatives to an IMF seen as subservient to American and European interests.

The alacrity with which the Fund has rushed to support countries and banks in Europe in the present crisis, even as the reform of voting power and board representation in the Fund proceeded at a glacial pace, would perhaps have done little to assuage these concerns. Yet the Fund wishes to remain at the heart of the reform of the international monetary order (exchange rate regimes, capital movements, liquidity provision, safety nets) and the rebalancing of the global economy. For this, it badly needs Asian engagement, particularly from the Asian emerging market members of the G20 (South Korea, Indonesia, China and India).

As widely reported in the Indian press, global growth in 2010, weighted by purchasing power parity, is now forecast at 4.6 per cent as against 4.2 per cent as recently as late April. Despite the turmoil in European sovereign debt markets, almost all parts of the globe have been upgraded. In addition, the charts supplied in the document clearly indicate that the world is experiencing a classic ‘V’-shaped rebound in output, of the kind associated with an extreme inventory cycle.

Within this generally positive global picture, as might be expected, both the absolute levels and the upgrade are strongest for Developing Asia: China, India and the ‘ASEAN-5’ (Indonesia, Malaysia, the Philippines, Thailand and Vietnam). The April projection of 8.8 per cent for calendar 2010 has been further boosted to 9.4 per cent. I would surmise that the main difference to the usual forecast of 8-8.5 per cent for fiscal 2010-11, is the very strong growth performance of the first quarter of this calendar year. Given the very weak performance in early 2009, this can have a big effect on the calculation of the change in average level of GDP for 2010 over 2009.

What does this comparatively buoyant picture imply for Indian policy? While the usual caveats about forecasts are in order, and for many parts of the world, notably the US, the jobs picture remains dismal; it now seems safe to say that the global recovery is well established. This was not my view at the time of the April monetary policy. My earlier concern was that simultaneous tightening of both fiscal and monetary policy was risky at a time when the global prospect was uncertain and domestic private investment was still shaky; but now, equity market developments, the continuing good news on the manufacturing front (the index of industrial production) and indirect tax receipts are reassuring.

This then leaves the external sector: trade, capital movements and the external price of the rupee. There have been a number of developments in this space in recent days. These include the release of the preliminary balance of payments data by RBI (Reserve Bank of India) for the full fiscal year 2009-10; the simultaneous release, also by RBI, of data on external debt of India; recent numbers on merchandise exports; the announced return to a gradual crawl of the Chinese yuan (RMB) against the US dollar; and the general recovery in world trade.

As I’ve noted, eminent Business Standard columnists have expressed concern on the real effective appreciation of the Indian rupee. In speeches delivered in Washington and Zurich, RBI Governor Subbarao has also expressed concern on volatile capital flows and their impact both on asset markets and on managing the nominal exchange rate. The balance of payments data for the last quarter of FY10, and for the full fiscal year, would seem to give some credence to these concerns, with the current account deficit estimated at 2.9 per cent of GDP by RBI. This is certainly a level that deserves watching, but given the big difference between the trade data reported by the Directorate General of Commercial Intelligence and Statistics and that reported by RBI, as well as the healthy growth of overall exports, it may make more sense to adjust the current account through fiscal consolidation, rather than through aggressive intervention in the exchange market.

Suman Bery is director-general, National Council of Applied Economic Research, and member, Prime Minister’s Economic Advisory Council.

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Re: Happy days ahead?

ตั้งหัวข้อ  sunny on Sun Jul 25, 2010 12:19 pm

SKorea-IMF emergency loan program aims to reduce stigma of asking for help
By: Foster Klug

WASHINGTON - Bitterness still lingers in South Korea over a painful international financial bailout in 1997. On the heels of the latest world financial crisis, a powerful Seoul now wants to help other countries needing aid.

South Korea is working with the International Monetary Fund on a new emergency loan program to reduce the stigma that countries have faced when dealing with the global lending agency. Officials hope to unveil it at a November summit of the Group of 20 major industrial countries that Seoul is hosting.

Details are still being worked out, but the South Korean proposal addresses some fundamental problems: Applying for an IMF loan can be seen as an admission that a country's economic health is even worse than the most pessimistic forecasts. That can cause turmoil in financial markets. Governments can also face anger at home over what are often perceived as humiliating conditions attached to the loans.

The new proposal aims to get around these hurdles by having the IMF identify a group of countries with otherwise healthy economies that have been hit by a sudden, quick-spreading global financial crisis.

The fund would then offer short-term, simultaneous loans to take care of liquidity problems and quell market turbulence in those countries. This would eliminate the need for a country to swallow its pride and approach the IMF on its own.

The program isn't for countries on the brink of defaulting on their debts. It's meant to keep countries with solid economic policies from being swept up in a meltdown that's no fault of their own.

For countries with the best-run economies, the loans would come without conditions, according to Shin Hyun-song, a senior economic adviser in the South Korean government. For countries outside that group, Shin said in a phone interview, South Korea and the IMF are still working out how stringent the conditions would be.

IMF Managing Director Dominique Strauss-Kahn has spoken of the need to quickly provide money to countries during a crisis, "to stop the falling dominoes."

"Of course, no country may want to move first, as that might risk sending the wrong message to markets," he said last month in a speech. "To get around this chicken-and-egg problem, we could think about providing multi-country assistance simultaneously."

Although the crisis that followed the 2008 collapse of the U.S. investment bank Lehman Brothers began in the United States, the repercussions were quickly felt around the world, including South Korea, Asia's fourth-largest economy and one of the world's major exporting nations.

Even at the height of the crisis, however, an IMF stigma kept many countries from asking the fund for loans.

"If you are seen going to the IMF, then this is a very strong sign that your economy is going very badly wrong," Shin said. "It's typically a cue for financial conditions to actually worsen."

The IMF is the globe's economic rescue squad, providing emergency loans to countries facing financial trouble. It came under severe criticism during the 1997-98 Asian currency crisis for the types of stringent conditions it imposed on countries in return for aid.

South Korea's experience with the IMF was painful. In 1997, national pride was battered when a liquidity crisis forced Seoul to seek a financial bailout in return for across-the-board monetary policy changes. South Korea ended up receiving a $58 billion package arranged by the IMF.

The country moved swiftly to reform its economy and ended up using only $30.2 billion, eventually paying it back in less than four years. Still, South Koreans call the Asian meltdown the "IMF crisis."
The IMF has been mindful of criticism. It has shown greater flexibility in the loans it has extended for countries caught up in the current crisis. It has also created a new line of credit for countries with solid economic track records that comes without the tough restrictions of normal IMF loan programs. Mexico, Poland and Colombia have petitioned for funds under the new lending program.

South Korea's new proposal is different. Instead of a normally healthy country going to the IMF and asking for a loan, "it's the fund going to the countries and saying, 'If you want to borrow, you can borrow,'" Ted Truman, a senior fellow at the Peterson Institute for International Economics, said.

Shin said this could help officials deal with modern economic meltdowns that spread instantaneously among linked banks in countries around the world.
__

AP Business Writer Kelly Olsen in Seoul, South Korea, and Associated Press Writer Harry Dunphy in Washington contributed to this story.

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Re: Happy days ahead?

ตั้งหัวข้อ  sunny on Wed Jul 28, 2010 12:06 pm

Getting the sequence right in regional financial markets

Author: Jenny Corbett, ANU, and Christopher Findlay, University of Adelaide

Managing the global recovery and the transmission of shocks that might accompany economic integration continues to be a talking point around the region. An example is the recent conference in Korea organised by the IMF.


These meetings generally conclude with statements that everything matters and statements such as ‘actions in multi-country frameworks can be used to complement strengthening measures adopted at the individual economy level’.

But what are the priorities? The best way to answer this question is to look at the data. In work for a recent ERIA project, research was conducted to check where shocks come from. Are financial markets the villains? Does financial integration promote the synchronicity of business cycles in economies in the region?

This relationship could actually work in either direction. Standard international business cycle models predict that greater financial integration should lead to lower synchronicity because of the opportunities to diversify risk, while models of contagion suggest a positive relationship.

Research in the ERIA project finds that a higher level of financial integration is not associated with an increase in business cycle synchronicity. This suggests that the business risk smoothing opportunities created by integrated financial markets dominate the contagion effects. Deeper financial integration, in other words, provides a buffer between economies that are integrated in other ways.

This result is important in the current debate, where it is often feared that the downside of greater financial integration is that it can pose risks to stability. It is also consistent with new research that argues that greater integration is not the problem on its own, but when a too-rapid liberalisation of financial markets interacts, for instance, with certain distortions in the economy such as weak and lax supervisory regulations as well as problems of credibility and enforcements of contracts, these distortions are magnified and financial instability problems arise.

Shocks to economies remain, of course, and the next question is how have they been absorbed? Research in the ERIA project was undertaken to measure how much of the change in a country’s domestic income (an income ‘shock’) is absorbed by offsetting movements in income from abroad (income risk sharing) and how much is offset by a change in national saving. Both of these changes can protect consumption from having to adjust to short-term changes in income. For countries in the region it was found that the current level of consumption smoothing is rather low. Most of the reduction in variation in consumption compared to income (23 per cent) comes via the use of credit markets (i.e. from changes in national savings) while capital markets (i.e. access to the international financial system) account for very little (2 per cent). These results mean that a very large part of changes in GDP (75 per cent) that lead to changes in consumption is not smoothed.

Our interpretation of this research is that the benefits of financial integration are not being fully utilised. There is room for welfare gain from greater financial openness in the region. On the other hand, this research suggests that constructing new ‘top-down’ institutions, such as systems for monetary integration, are not a priority. Those institutions are very difficult to establish efficiently in the presence of the range of country differences that are also identified in this research. Instead, of more value in the immediate term is to identify the impediments to the consumption-smoothing role that integrated capital markets might play. In other words, there is greater value in further work on a ‘bottom-up’ approach to integration, including action at the national economy level but supported by regional cooperation.

Despite this skeptical finding about large-scale institution building related to financial markets at this stage of the region’s development, there remains a rich agenda for regional cooperation. Within the region, there are not only significant country differences in experiences, but also a wide range of experiences of various sorts of institutional structures in financial markets and their links with local corporate structures. There is a lot of experience to share in well-designed capacity building programs backed up by good research.

Jenny Corbett is a professor of economics at The Australian National University and executive director of the Australia-Japan Research Centre (AJRC). Christopher Findlay is head of the School of Economics at The University of Adelaide.

_________________
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Re: Happy days ahead?

ตั้งหัวข้อ  sunny on Wed Jul 28, 2010 10:52 pm

IMF: China Currency Undervalued But Policy Sound

BEIJING — The International Monetary Fund said China's yuan is undervalued in a mildly worded assessment Wednesday of its controversial currency controls and praised Beijing's response to the global crisis.

The comments came in a review by the Washington-based fund of Chinese economic policy, the first in three years. Such reviews usually are annual but the process was postponed due to disagreements with Beijing.

The IMF said several members of its board "agreed that the exchange rate is undervalued" but gave no details. The 24-member board includes the United States, China, several other individual governments and members that represent groups of economies.

Beijing held the yuan steady against the dollar beginning in late 2008 to help China's exporters compete amid weak global demand. Washington and other trading partners complain that has hurt their companies and some US lawmakers demanded sanctions on Chinese goods.

China's central bank announced in June it would allow a more flexible exchange rate and private sector analysts expect the yuan to gain in value over time.

The IMF said a stronger yuan would help to encourage Chinese consumer spending, helping to achieve Beijing's goal of reducing dependence on exports and making its economy more self-reliant.

The IMF praised Beijing's rapid response in 2008 to the global crisis, which included tax cuts, incentives for consumer spending and higher social spending.

"The authorities' quick, determined and effective policy response has helped mitigate the impact on the economy and ensured that China has led the global recovery," the fund said in a statement issued in Washington.

China rebounded quickly from the global crisis and economic growth surged to 11.9 percent over a year earlier in the first quarter of this year. That eased to 10.3 percent in the second quarter, which the government said was the result of policies meant to slow growth to a more manageable level and avert inflation.

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Re: Happy days ahead?

ตั้งหัวข้อ  sunny on Wed Jul 28, 2010 10:57 pm

India Hikes Key Interest Rates More Than Expected
By ERIKA KINETZ / AP WRITER

MUMBAI — India's central bank hiked key interest rates more than expected Tuesday to combat rising prices and raised its growth and inflation forecasts for the year.

The Reserve Bank of India hiked the repo rate—at which the central bank makes short-term loans to commercial banks—by a quarter percentage point to 5.75 percent. It raised the reverse repo rate—the rate at which it borrows from commercial banks—by an unexpected half percentage point to 4.5 percent.

Economists had expected quarter point hikes in both rates. The bank left the cash reserve ratio unchanged at 6.0 percent, as expected.

"The dominant concern that has shaped the monetary policy stance in this review is high inflation," Governor D. Subbarao said in his policy statement. "With growth taking firm hold, the balance of policy stance has to shift decisively to containing inflation."

Central banks across Asia are raising rates as they unwind post-crisis stimulus measures. South Korea, Malaysia, Taiwan and Thailand all raised policy rates in the last two months. But India faces the added pressure of inflation, which has been far higher than in neighboring countries since 2008.

Headline inflation, which hit 10.6 percent in June—a number that may well be revised upward—has been in the double digits since February. High prices have become a political issue, with opposition parties staging protests, and policymakers keen to check rising prices.

Last year's drought pushed food prices up precipitously. This year the monsoon rains, which crash across India from June to September, are 14 percent below normal. Government meteorologists are predicting that overall rains will be normal, and the central bank said crop area has increased from last year, promising bigger harvests and lower food prices.

The bank raised its forecast for economic growth for the year through March 2011 to 8.5 percent from 8 percent thanks to better than expected industrial production and despite resurgent concerns about the health of the global economy. It raised its inflation forecast for March 2011 from 5.5 percent to 6.0 percent.

The bank said it is concerned that a faltering global economy could crimp trade, hitting India's manufacturing and service sectors.

A bigger worry, however, is that growing risk aversion would keep foreign investors out of India, slowing capital inflows needed to fund the nation's widening current account deficit and meet credit demand.


The bank has hiked policy rates by three quarters of a percentage point this year, but still has a way to go before getting back to pre-crisis levels.

Rajan Bharti Mittal, president of business lobby group FICCI, said the hikes came as a "big surprise" and run the risk of slowing industrial growth.

There is an "underlying fear" that the rate hike will eventually lead to higher lending rates at commercial banks, he said in a statement.

A recent FICCI survey showed that 40 percent of business owners feel high borrowing costs are an impediment to performance.

Bank of America managing director Jayesh Mehta said the Reserve Bank did a good job balancing inflation and growth as India faces an uncertain global economy.

Like many others, Mehta expects the bank to hike rates by another quarter point in September, calling it a "done deal."

"But we have to see how global things pan out, how commodity prices move and how inflation gets affected," he said. "Inflation is a worry but if global commodity prices come off—people are talking about a double dip—I don't think we're going to be insulated."

Meanwhile, there is only so much monetary policy can do to tame spiraling prices, which have been driven by rains, global commodities markets and supply side constraints.

"There's a lot of supply side problems and huge demand growth," said Shishir Bajpai, a senior vice president in private wealth management at Mumbai's IIFL Capital. "Just increasing the rate—as RBI also knows—won't itself curtail inflation. But it has to do what it can."

The bank said the government's recent decision to partially deregulate oil and gas prices will add one percentage point to headline inflation. Higher minimum payments to farmers will further fuel price rises.

The bank also said that given the rapidly evolving economic situation, it would conduct policy reviews every six weeks, instead of every quarter.

Investors took the news in stride. The benchmark Sensex index rose as much as 0.7 percent after the bank's announcement, before settling to close up 0.3 percent at 18,077.61 points.

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Re: Happy days ahead?

ตั้งหัวข้อ  sunny on Thu Jul 29, 2010 11:53 pm

'Softened' IMF tone eases yuan pressure

The International Monetary Fund's (IMF) softened tone toward China's exchange rate regime will ease pressure on the appreciation of the yuan, when the world's third-largest economy faces increasing risks of a slowdown, Chinese economists have said.

In a summary of comments by the IMF's 24-member executive board on Chinese policy released on Tuesday, the Washington-based lender welcomed China's recent decision to return to a managed floating exchange rate system but contended that the yuan was still "undervalued".

The tone was slightly different from the IMF's long-held position, which claimed that the Chinese currency is "substantially undervalued". IMF Managing Director Dominique Strauss-Kahn reiterated the stance in June.

China scrapped the yuan's 23-month-old peg to the US dollar and pledged to seek greater flexibility in the value of its currency on June 19. The yuan has edged up about 0.7 percent since.

"Given the current downside risk that the Chinese economy is facing and the complicated external environment, it is not realistic to expect the yuan to appreciate significantly," said Zhang Xiaojing, a senior economist at the Chinese Academy of Social Sciences. Zhang said he expects the yuan to rise about 3 percent this year.

"The view showed that the IMF has recognized China's effort in pursuing greater currency flexibility and generally agreed with the country's approach to let the yuan appreciate in a gradual manner," Zhang said.

The country's economic growth slowed to 10.3 percent in the second quarter, from the 11.9 percent three months earlier, due to tightening measures on the property sector and control on credit growth. These added to uncertainty in the country's economic outlook for the rest of the year, analysts said.

However, the IMF report indicated that it remained optimistic about China's growth outlook, forecasting that the Chinese economy will expand at 10.5 percent this year.

Hu Xiaolian, vice-governor of the People's Bank of China, the central bank, said in an article published on the bank's website last week that the exchange rate will maintain overall stability at a reasonable and balanced level. But the currency might show

"two-way movements" against a single currency depending on market conditions, Hu said.

The IMF report said some of its board members agreed that the exchange rate is undervalued, but other members disagreed with the assessment of the exchange rate, noting that it is based on uncertain forecasts of the current account surplus.

The IMF's conciliatory tone came after the release of the much-awaited US Treasury report earlier this month, when it admitted that China's economic rebalancing policies have led to "a significant decline" in its current account surplus and "China has made progress" in rebalancing its growth. The Treasury report did not label China as a currency manipulator.

Chinese economists forecast that the country's exports will face tougher conditions in the second half due to lackluster external demand, which will lead to a further drop in the country's trade surplus.

"Since the outbreak of the financial crisis, it was the international capital flow, rather than current account surplus, that has contributed much to an imbalance in China's international payments," said Dong Xiaojun, professor at the economic research center with the Chinese Academy of Governance.

Current account surplus accounted for 69 percent of China's international payment surplus in 2009, compared with an average of 76.2 percent in the past decade, Dong said. The figure has dropped to 43 percent in the first quarter of this year, she said.

"Therefore, it is not reasonable to blame China's exports as the cause of the country's surplus in international payments. Countries implementing loose monetary policy during the crisis should also take the blame," she said.

By Wang Bo, China Daily

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Re: Happy days ahead?

ตั้งหัวข้อ  sunny on Sun Aug 01, 2010 11:25 pm

Rising yuan will not hurt trade

There is no foundation for the yuan to move sharply and China can maintain a flexible exchange rate mechanism, making the currency stand at a basically reasonable and balanced level, a senior central bank official said on Friday.

Yi Gang, vice-governor of the People's Bank of China, said the pressure for yuan appreciation had eased as the value of the currency neared the equilibrium level after years of adjustments.

Yi, who is also head of the State Administration of Foreign Exchange (SAFE), said China would maintain its economic growth at above 9 percent this year. The country has overtaken Japan to become the world's second-largest economy.

"GDP growth will gradually slow down, but, if the country can strive to secure growth of an annualized 7 to 8 per cent this decade, that would still be a strong performance," Yi said.

Economists are interpreting the remarks, together with a series of public statements by another central bank vice-governor, Hu Xiaolian, on the benefits of a managed floating of the yuan, as sending a signal that China will maintain its currency's general stability and help ease the excessive focus on the yuan's value against the dollar.

"There is no need to focus solely on the yuan/dollar rate, because the structure of China's exports is changing greatly from what it was five years ago," said Zuo Xiaolei, chief economist at Galaxy Securities.

Europe has replaced the United States and become China's largest trading partner and yuan-denominated trade deals are also increasing, Zuo said.

"That means, we should pay more attention to the trade-weighted exchange rate because the country's trade is settled in more diversified currencies," she said.

The central bank is considering publishing the yuan's nominal exchange rate measured against the currencies of China's trading partners, which would lead to a more rational debate about the real value of the Chinese currency, the central bank's Hu said last week.

China scrapped its 23-month-old peg to the greenback in mid-June. Since then, the currency has risen some 0.7 percent.

In Hu's latest statement about China's currency policy, which was posted on the central bank's website on Friday, she played down the yuan's impact on the country's exporters and said exchange rate reform would help ease inflationary pressure and reduce the cost of imports.

"The yuan's appreciation between 2005 and 2007 did not have a significant impact on the country's exports we must not underestimate exporters' flexibility and ability to adapt to a changing environment," Hu said.

However, economists said it is necessary to evaluate whether the yuan's appreciation has narrowed exporter's profit margins, especially at a time when external demand remains weak.

"A mild revaluation of the yuan might not affect exporters significantly but many of them couldn't survive if the currency goes up too fast," said Li Jianwei, senior economist at the Development Research Center of the State Council.

Source: China Daily

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Re: Happy days ahead?

ตั้งหัวข้อ  sunny on Sun Aug 01, 2010 11:41 pm

China aims to make yuan convertible

The ultimate goal of China's exchange rate reform is to make the yuan a fully convertible currency, Yi Gang, head of the State Administration of Foreign Exchange (SAFE), said Friday.

Yi, also deputy governor of the People's Bank of China, the central bank, made the remarks in an interview with Caixin media's China Reform magazine, which is posted on the SAFE website.

"There is no official timetable for a convertible yuan," he said in the interview with the magazine's executive editor Hu Shuli.

The Chinese currency, or the RMB, still shoulders the pressure of appreciation albeit the pressure has eased, as the value of the currency drew close to the equilibrium level after adjustments in the past decade, Yi said.

There is no foundation for the yuan to move sharply, according to Yi.

China can maintain a flexible exchange rate and make the currency stand at a basically reasonable and balanced level, he said.

He added that since China is a large country and its development is unbalanced, the issue becomes more complicated.

"Generally speaking, a convertible currency is one whose exchange rate can float freely," he said.

Asked whether the yuan may turn into a reserve currency, Yi said it depends upon the market demand.

"We should not push it hard. Do not be talked into the belief that the yuan is very close to a reserve currency. It, in fact, lags far behind that level," Yi said.

China abandoned a decade-old peg to the U.S. dollar five years ago by allowing its currency to fluctuate against a basket of currencies and appreciate by 2.1 percent.

Since then, the yuan has strengthened further, though slowly, and has risen more than 21 percent against the greenback.

On June 19 this year, the Chinese central bank announced that it would further the reform of the yuan exchange rate mechanism to improve its flexibility.

Source: Xinhua

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