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China needs to disclose foreign exchange market intervention: US

Press Trust of India
Apr 16, 2014 at 07:18am IST

Washington: Like other large emerging market countries including India and Brazil, China also needs to disclose its foreign exchange market intervention to increase the credibility of its monetary policy framework and to promote exchange rate and financial market transparency, the United States has said.

"In line with the practice of most other G-20 nations, China should disclose foreign exchange market intervention regularly to increase the credibility of its monetary policy framework and to promote exchange rate and financial market transparency," it said.

In its six monthly report to the US Congress, the Department of Treasury, however, declined to name China a currency manipulator even though it noted that its currency renminbi (RMB) has not appreciated as fast or as much as

China needs to disclose foreign exchange market intervention: US

In its report to the US Congress, the Department of Treasury declined to name China a currency manipulator even though it noted that its currency RMB has not appreciated.

needed.

The RMB's recent depreciation underlines the importance of a significant increase in the transparency of China's actions in the foreign exchange market, it said. "Because China still does not provide transparent disclosure of its activity in the currency market, market participants and other observers must resort to estimating China's intervention using published reserve levels and changes in the central bank balance sheet," the Treasury said in its report.

"Other large emerging market countries including India, Russia, and Brazil disclose their monthly intervention in the foreign exchange market, with several publishing daily intervention data," it said.

According to the report, while the desire to introduce two-way volatility in the RMB foreign exchange market is clear, recent developments in the RMB exchange rate raise particularly serious concerns, if they presage a retreat from China's announced policy of allowing the exchange rate to reflect market forces, reducing exchange market intervention, and moving toward a market-determined exchange rate.

"We will continue to monitor this issue closely going forward," it said. Based on the analysis in this report, the Treasury Department has concluded that the standard identified in Section 3004 of the Congressional Act has not been met with respect to any of the countries covered in this Report for the period evaluated.

"The report concludes that, although global growth prospects are improving, progress on rebalancing global demand remains inadequate," it said. "China's currency (RMB) appreciated on a trade-weighted basis in 2013 but not as fast or by as much as is needed, large-scale intervention has resumed, and so far this year the currency has reversed the appreciating trend.

The recent widening of the trading band gives China the opportunity to reduce intervention and allow the market to play a greater role in determining the exchange rate, it said.

The report notes that recent developments in the RMB exchange rate would raise particularly serious concerns if they presage renewed resistance to currency appreciation and a retreat from China's announced policy of reducing intervention and allowing the exchange rate to reflect market forces.

According to the report the central bankers of the emerging market economies face a balancing act with respect to raising interest rates to support their currencies: higher interest rates lend support to currencies while withdrawing

support to the real economy.

In some cases, the prolonged period of low interest rates has fuelled a rapid build-up of debt which, in the context of a weakening economic outlook, could precipitate a disorderly unwinding of financial imbalances as interest rates rise, it said.

Balancing these considerations, a number of central banks responded with strong policy rate hikes in late January and early February with positive results as currencies have stabilized and some have appreciated since early February.

Specifically, the Central Bank of Turkey hiked rates by a de facto 225 basis points, and the South African Reserve Bank hiked rates by 50 basis points. "The hikes followed a 50 basis point rate increase by Brazil on January 15, which was art of a sustained tightening cycle in Brazil that began in 2013.

Similarly, the Reserve Bank of India hiked rates by 25 basis points between December and February as part of a tightening cycle that began in September," the Treasury said.BLUR_B

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