Cooperation between China and US healthy for both, premier says

Premier Wen Jiabao said on Wednesday that China will intensify its currency regime reform and the foreign exchange rate has possibly reached "equilibrium", a signal that there is little room for the renminbi to appreciate soon.

"In the Hong Kong market, the non-deliverable forwards (a type of futures contract) have started to fluctuate in both directions. And this tells us that the exchange rate of the renminbi has possibly reached equilibrium," Premier Wen Jiabao said at a news conference at the end of the National People's Congress session.

"China will go on intensifying foreign exchange reform, especially to allow relatively wider, two-way fluctuation."

The yuan has gained 30 percent in real terms since 2005. But it dropped by 0.7 percent against the dollar this year after surging by 4.7 percent in 2011, while China's exports have been hurt by the slackened global demand, especially because of the European debt crisis.

In February, China's imports gained by 39.6 percent from a year earlier, and exports grew by 18.4 percent, causing a $31.5 billion trade deficit in February, the biggest since 1990. Experts said this will slow the pace of gains in the Chinese currency in the coming months.

"The premier's remark on equilibrium means China will not allow its currency to rise by much in the short term, or say this year," said Li Wei, an economist at Standard Chartered Shanghai.

"And it also shows the nation is not optimistic about China's economy and the exports dragged down by the European debt crisis," he added.

In the annual Government Work Report last week, Wen cut China's expected economic growth rate this year to 7.5 percent.

"China aims for quality growth in the economy, and we want to solve the problem that China's economy is unbalanced, uncoordinated, and unsustainable," Wen said.

Some countries, including the United States, have been pressuring China to allow its currency to rise further, saying its trade surplus demonstrates the need.

But Wen said China's foreign trade is "basically balanced", and the surplus dropped to 2.8 percent of the gross domestic product last year.

During this year's NPC and CPPCC sessions, People's Bank of China Governor Zhou Xiaochuan said China may "appropriately" widen the yuan's trading band.

"Premier Wen's remarks that China will continue to push for relatively big-scale and two-way fluctuation in the currency is excellent because it takes us a lot closer to the point that the renminbi can be freely traded," said Simon Derrick, head of currency strategy at BNY Mellon, an investment management and services company in New York.

Stephen Gallo, head of market analysis at financial service provider Schneider Foreign Exchange in London, agreed.

"Overall, the recent fluctuations in renminbi are more important from a structural rather than a cyclical perspective - in other words, China's words and its deeds certainly suggest that the case for a more flexible yuan is gaining traction on the part of policymakers," Gallo said.

The best way to solve the "difficulties and frictions caused by the trade imbalance between China and the US is to cooperate", Wen said.

Wen's remarks come at a time that trade and economic tensions between China and the US have been intensifying for several months, in which time the US lodged an appeal about China's rare earths exports policies with the global trade arbitrator and established an interagency trade enforcement unit to see whether nations, including China, play by the rules.

On Tuesday, the US brought up a case before the World Trade Organization about China export restrictions on rare earths, 17 rare elements used in a number of high-tech items ranging from wind turbines to missiles.

Japan and the European Union joined the US in challenging China's export policy.

Wen didn't mention the rare earths case during the news conference, but he called for cooperation between China and the US. "Cooperation would lead to healthy and sustainable growth for both economies," he said.

China and the US should promote "bilateral trade and two-way investment", enhancing cooperation in new energy, new materials, environmental protection, aviation and other high-tech fields, Wen said.

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