Zhou Says China ‘Passive’ as Dollar Drop Pulls Yuan

By Bloomberg News

Nov. 20 (Bloomberg) -- China is “passive” on the value of the U.S. dollar, central bank Governor Zhou Xiaochuan said, signaling that policy makers aren’t yet prepared to loosen controls on the yuan.

“It’s like watching a tournament,” Zhou said at the BusinessWeek CEO Forum in Beijing today. “We just watch the game. Regardless who wins or loses, the issue of whether the winner or loser benefits the spectator doesn’t arise.”

Zhou’s comments came hours after U.S. lawmakers pushed for a tougher stance from President Barack Obama’s administration after he left Beijing this week without a commitment to let the exchange rate strengthen. The yuan has tracked the U.S. Dollar Index’s 7.3 percent decline against six major currencies this year because China restored a peg in July 2008.

“Zhou’s words may indicate China won’t let the yuan float in the short-term,” said Shi Lei, a Beijing-based financial market analyst at Bank of China Ltd.

Twelve-month non-deliverable yuan forwards were little changed at 6.6365 per dollar as of 10:50 a.m. in Hong Kong, according to data compiled by Bloomberg. The contracts are down 0.74 percent since Nov. 13, set for the biggest weekly decline since December.

China has kept the yuan about 6.83 per dollar after allowing a 21 percent advance over three years. Zhou said today that the level of the dollar is contingent on the global and U.S. economy. Asked whether a weak dollar is good or bad for China, he said “we are passive in the matter of the dollar’s level.”

U.S. Goal

Treasury Secretary Timothy Geithner said at a hearing in Washington he’s “quite confident” China will move to relax currency controls. Jon Huntsman, the American ambassador to China, told Bloomberg Television this week that Obama told President Hu Jintao and Premier Wen Jiabao the U.S. expects progress on making the yuan “more flexible” by mid-2010.

Zhou also said today that Chinese policy makers are “flexible” about the need to maintain stimulus measures, indicating that decisions on the matter would be affected by the strength of economies abroad.

“There are signs of recovery, we will continue to maintain the moderately loose monetary policy and expansionary fiscal policy for a while,” Zhou said. “But we should also be flexible. We will monitor the economies of the U.S., EU, Japan and the emerging markets. We will have to monitor the pace of recovery in the world economy.”

Helping China

Robert Mundell, a Nobel laureate in economics, said at the Beijing conference that the Federal Reserve’s interest-rate cuts and a weakening dollar have helped secure China’s economic recovery.

Mundell, a Columbia University professor, said that global policy makers should be “very cautious about the effects of the exit policy” on the world’s economy.

Any gains in the yuan may hamper a recovery in the global economy, a professor at China’s Tongji University wrote in an article published today in the state-owned People’s Daily newspaper.

Exchange rates in the world’s major economies shouldn’t be altered “abruptly” as the global recovery isn’t “stable,” Shi Jianxun wrote in the international edition of the paper owned by China’s Communist Party.

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said Chinese growth is likely to be hurt by an absence of consumer demand from trading partners such as the U.S.

Chinese ‘Bubble’

“The Chinese, I suspect, will have a bubble of their own to confront,” Gross said in a Bloomberg Television interview yesterday from Pimco’s headquarters in Newport Beach, California. It’s gearing up for export that doesn’t find an end consumer, that’s the real problem in China.”

At the congressional Joint Economic Committee hearing, Senator Charles Schumer, a New York Democrat, said he’s “not happy” about a lack of movement on China’s yuan stance and called its policies “mercantilist.”

Senator Sam Brownback, a Kansas Republican, opened the session by urging Geithner to “get the stick out” and “do something” to get China to move faster.

“The dollar is clearly under attack and as is usually the case when the currency of any country is under attack, the officials want to point the finger at someone else,” Stephen Roach, chairman of Morgan Stanley Asia, said in Singapore today.

“The tensions between the fate of the dollar and the renminbi underscore my own concerns about the biggest risk that the world does face over the next couple of years and that is the possibility of a more explosive clash on trade policy between the U.S. and China.”

Zhou also said today that China hasn’t abandoned plans to make the yuan convertible.

To contact the Bloomberg News staff for this story: Eugene Tang at eugenetang@bloomberg.net