Financial Times; Sep 16, 2003 S&P warns China on floating currency By James Kynge in Beijing
Standard and Poor's, the international ratings agency, warned yesterday that allowing China's currency to float would imperil the country's banking system and damage its creditworthiness. The rating agency's warning came as the US dollar sank to a record discount to the renminbi on Singapore's futures market, a move that implied traders expect the Chinese currency's value to rise by 2.3 per cent against the dollar over the next year. Expectations of a stronger renminbi were driven in part by criticism last week from Wim Duisenberg, European central bank governor, of the predominance in Asia of fixed exchange rates that are based on a US dollar peg. The renminbi's value is virtually pegged to that of the US dollar. But S&P focused on the potential cost to China of freeing up its exchange rate in line with recommendations by John Snow, US treasury secretary, as well as senior Japanese and European Union officials. "Despite increasing pressure on China by its trade partners, including the US and Japan, to revalue its currency, preferably by allowing the Chinese renminbi to float, S&P considers that lifting of exchange controls at the moment could be risky as Chinese banks are ill-equipped to handle volatility in the exchange rate," said Ping Chew, the rating agency's China analyst. The main worry was that opening the closed capital account and allowing the renminbi to trade freely could have put the country's insolvent banks into grave danger. If depositors decided en masse to divert their savings to better quality banks, then China's "big four" state banks could quickly face crisis. Such a scenario, S&P said, could undermine the country's sovereign creditworthiness and that of domestic banks. S&P puts the number of problem loans in China's banking system at around 45 per cent, about double the official figure. China's economic policymakers have long been aware that a currency float could endanger its banks. Beijing has declined calls to revalue but says it plans to introduce more flexibility into its exchange rate system and widen the band within which the renminbi trades against the US dollar. The main way in which Beijing plans to introduce that flexibility is by relaxing some exchange controls to increase demand for the US dollar. Chinese citizens have been allowed to take more hard currency abroad, more Chinese companies have been permitted to buy US bonds, and exporters are allowed to keep a greater proportion of their dollar earnings than previously.
