China has lost faith in the stability of the U.S. dollar and its first priority is to broaden the exchange rate for its currency from the dollar to a more flexible basket of currencies, a top Chinese economist said Wednesday at the World Economic Forum.
At a standing-room only session focusing on the world's fastest-growing economy, Fan Gang, director of the National Economic Research Institute at the China Reform Foundation, said the issue for China isn't whether to devalue the yuan but "to limit it from the U.S. dollar."
But he stressed that the Chinese government is under no pressure to revalue its currency.
China's exchange rate policies restrict the value of the yuan to a narrow band around 8.28 yuan, pegged to $1. Critics argue that the yuan is undervalued, making China's exports cheaper overseas and giving its manufacturers an unfair advantage. Beijing has been under pressure from its trading partners, especially the United States, to relax controls on its currency.
"The U.S. dollar is no longer -- in our opinion is no longer -- (seen) as a stable currency, and is devaluating all the time, and that's putting troubles all the time," Fan said, speaking in English.
"So the real issue is how to change the regime from a U.S. dollar pegging ... to a more manageable ... reference ... say Euros, yen, dollars -- those kind of more diversified systems," he said.
"If you do this, in the beginning you have some kind of initial shock," Fan said. "You have to deal with some devaluation pressures."
Comments: This is not good news for the dollar.
First, a major trading partner has publicly stated the dollar is unstable. This comment, when combined with the survey released earlier this week about other central bankers shying away from the dollar in favor of Euros, is pretty damn bearish. These two news events indicate that not only are people more comfortable speaking negatively about the dollar, but they are thinking very seriously about moving away from the dollar.
Secondly, fewer people buying any good means the value of that good decreases. This is simple supply and demand. So, we have a situation where our largest trading partner is thinking about buying fewer dollars at a time when the dollar's value is already falling. Can you say "pull the rug out?"
Third, the CBO announcement that the Federal Budget Deficit is projected at $400 billion this year does not help the dollar's value. The primary reasons for the dollar's drop over the last half-year are the Federal and trade deficits. Bush's budget simply piles on more debt, which the dollar does not need right now. To make matters worse, Bush is saying 1 trillion is required for SS privitization. Just what we need -- more debt.
The world markets have been shooting shots across the US for the last year regarding our fiscal health. Bush doesn't listen. He's too busy talking to whoever he's talking too to listen. And Secretary Snow is no better.
For Shit's sake -- will somebody in this administration listen?
http://biz.yahoo.com/ap/050126/world_forum_china_5.html