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Currency system reform 'urgent issue' for China: MOF's Watanabe

TOKYO, July 20 Kyodo

Japan's top currency official urged China on Wednesday to relax its dollar-pegged currency system, saying it is an ''urgent issue'' for the country due partly to the emergence of excess liquidity in its booming economy.

Hiroshi Watanabe, vice finance minister for international affairs, said growing speculation over the possibility of the revaluation of the yuan spurred ''unaccountable'' flows into China of

$100 billion worth of foreign currencies in 2004.

Such excess liquidity has sparked inflationary pressure, real estate price hikes, and surges in the amount of inefficient power generation and iron-manufacturing equipment, he said in a lecture at the Japan National Press Club in Tokyo.

Watanabe said China does not have to consider delaying currency reforms for fear that a huge inflow of speculative funds may destabilize its financial system.

China's economy -- the world's seventh largest -- is too big to be hurt by speculative moves of hedge funds, unlike Southeast Asian economies that suffered from such moves during the 1997-1998 Asian financial crisis, he said.

Watanabe repeated Japan's stance that China should move to a more flexile exchange system for the sake of its economy and the world economy.

But Watanabe cited vulnerability in China's banking system, with sizable bad loans, and unemployment problems in rural areas as major reasons for China to be hesitant about adopting flexible foreign exchange policy.

Revaluing the yuan is expected to increase agricultural imports to China by making foreign-made farm products more competitive. Increased farm imports may cause the number of unemployed people in rural parts of China to increase by 100 million or 150 million from the current 150 million, he said.

China has pegged its currency in a tight range of around 8.28 yuan to the U.S. dollar. Critics say this keeps the currency artificially low and gives Chinese exports an unfair advantage in global markets.

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