MNI INTERVIEW2: Yuan To Stay Stable, China To Adjust Subsidies

By Iris Ouyang

     BEIJING (MNI) - The yuan should remain relatively stable against the dollar

this year, in line with U.S. demands in trade talks, and China will seek to

adjust its subsidies for state-owned enterprises in line with World Trade

Organisation rules, a researcher at a government think tank told MNI in an

interview.

     "The yuan should stay at around 6.7000 against the dollar this year,

without big fluctuations," said Zhang Huanbo, deputy director of the U.S.-Europe

Research Institute and a macro-economy researcher at the China Center for

International Economic Exchanges, a think tank managed by the economic planning

body National Development and Reform Commission. "Because both the Chinese and

U.S. economies should be relatively stable."

     "Our balance of payments surplus is relatively big, which increases demand

for the yuan, so there'll be some upward pressure," Zhang noted. "But from the

perspective of economic growth, a slight depreciation would benefit exports.

Balancing these two elements, the yuan should be relatively stable."

     China doesn't want to intervene in foreign exchange markets other than to

curb speculation, he said, noting that no countries want big currency

fluctuations which impact on trade.

     "We are willing to reduce intervention in the market, as we have been

reforming our exchange rate system," he said, adding that China will need

tighter regulation on capital flows to guard against speculation as its economy

opens up more.

     "We need more opening up to allow more capital to enter China," he said.

"When the capital pool is enlarged, our capability to counter risks should be

stronger."

     --SUBSIDIES

     Progress towards internationalisation of the yuan, which slowed last year

amid a sluggish global economy, also needs to be sped up, Zhang said.

     "We need to build offshore yuan trading centres, and to innovate with

yuan-denominated investment products such as bonds. Through these products we

can stabilize the value of the yuan."

     China is also examining its subsidy policies to steer them into line with

World Trade Organization rules, another key U.S. demand, Zhang said.

     "We've subsidised industries strictly within the scope of WTO rules since

joining the organization," he said. "Some subsidy policies may to some extent

distort market competition, so we need to gradually correct them, so they follow

WTO rules."

     Zhang said China would refer to WTO rules and not accept U.S. demands on

standards for subsidies, which he said were needed for development.

     He predicted fewer requirements for joint ventures in China, which

Washington says has been one of the major channels for Chinese companies to

transfer technology from American companies.

     "We have never forced tech transfer," Zhang said. "Companies sharing

technologies is market behaviour. Previously China has required foreign

companies to participate in joint ventures in order to invest in some

industries, but we are gradually reducing such requirements."

     Zhang saw further opening of the financial sector, and fewer restrictions

on foreign car makers' investments in China. Authorities also need to work to

disseminate a culture of respect for intellectual property, and not just punish

offenders, he said.

     Private and foreign companies would also be allowed to increase their

investment in state-owned companies, Zhang said.

     "The next step of SOE reform is towards a direction of mixed-ownership,

that is to allow private companies to participate," he said.

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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