TRADERS CAUTIOUSLY OPTIMISTIC ABOUT CHINA CURRENCY MOVES

TRADERS CAUTIOUSLY OPTIMISTIC ABOUT CHINA CURRENCY MOVES

International traders and investors reacted with cautious optimism this week to media reports that China will eliminate its official exchange rate system next year.

Despite a recent pronouncement by a leading official, members of the business community said they will adopt a wait-and-see approach toward long- hoped-for moves toward a fully convertible currency in China."To say it's a floating rate doesn't (necessarily) mean it's based on supply and demand in the market," said Julie Rienganum, president of Pacific Rim Resources in San Francisco.

"This would be an incremental step but it is no panacea," she said, adding, "The Chinese, in an effort to get into GATT (the General Agreement on Tariffs and Trade) and to gain credibility with international institutions, come out with statements that are worded very carefully. They don't like to overcommit."

GATT is the Geneva body responsible for overseeing world trade in goods. The Chinese have been seeking entry into the body but must first satisfy a number of technical and procedural requirements.

A representative of a leading business organization with strong ties to China said, "My own gut feeling is that a unified exchange rate doesn't imply convertible currency. They have been talking about unified rates forever."

"Unified rates are a nice first step but what everyone is looking for is the ability to wire your money right out without relying on" devices such as mandatory deposits in state-owned banks, the representative said.

Earlier this week, an official Chinese newspaper quoted a leading official as saying the country planned to drop its exchange rate system as part of the drive toward a freely convertible currency.

The existing two-tiered system includes an official exchange rate and a market-driven rate at official foreign currency swap centers. The official exchange rate for the Chinese yuan, also called renminbi, is 5.8 to the U.S.

dollar.

However, a mere fifth of all hard-currency transactions are conducted at the official rate. The remainder occur at about 100 swap markets, where Chinese importers, exporters and joint ventures buy and sell currency based on the market, where the exchange rate is roughly 8.7 to the dollar.

Foreign investors are often hamstrung by the two-tiered system because they are required to convert their share of capital at the lower, official rate. They are also required to place all hard currency into Chinese banks, making capital more scarce and expensive to themselves and their Chinese joint venture partners.