Updated: 2005-06-29
The World Bank's director for China said on Tuesday Beijing's fixed exchange rate policy was a "legitimate choice" and not a manipulation of the yuan currency, despite escalating rhetoric from Washington.
"I don't agree with any of the criticisms of China that it is manipulating its exchange rate," David Dollar told a meeting of the Washington-based Center for Global Development.
"My own preference would be to move to a more flexible exchange rate system (but) it is a very difficult thing to manage and lots of developing countries have had financial crises as they have made this transition, so I respect the fact that the Chinese authorities are cautious," he added.
The Bush administration has been pushing for a revaluation of the yuan, which has been pegged at 8.28 to the dollar for more than 10 years -- a level U.S. exporters and many lawmakers complain keeps China's goods unfairly cheap.
The Treasury Department last month warned that China risked being branded a manipulative trading partner if it did not take significant action on its currency in the next few months.
The World Bank's Dollar, who is based in Beijing, said loosening the yuan's peg to the U.S. dollar did not necessarily mean the Chinese currency would stay strong over the long run.
"It is a toss-up which way it will go ... I wouldn't assume that if they make it more flexible that the (long-term) tendency is going to be toward appreciation."
He said the more pressing issue for China was to shift its economic focus to growing domestic demand, rather than relying on investment- and export-led growth.
"The export orientation has been a very good strategy for China but it has its limitations. And for China to continue to grow rapidly it will need to rely more on domestic consumption," he said.
China's exports have climbed at a 20 to 30 percent annual clip, well ahead of world trade growth rates of just 6 to 8 percent, Dollar noted.
The transition to a domestically driven economy carries risks, but these would be mitigated by a more flexible yuan, reform of state-owned commercial banks and more developed pension and health insurance systems, he said.
If China's institutions do not become more sophisticated to support such a shift, "we will definitely see a period in which China's growth slows down quite significantly," Dollar said.
He said prospects were "good" for China's economy to keep growing in the 6 to 7 percent range, as the Chinese labor force moves from farming to urban employment.
The Chinese government has projected that some 300 million people will migrate from rural areas of China to cities over the next 15 to 20 years -- equivalent to rural-urban migration of Europe over 200 years.
