2011/01/19

Hu calls currency system 'product of the past'

WASHINGTON, January 19, 2011 (AFP) - China's President Hu Jintao said Sunday the international currency system was "a product of the past," but it would be a long time before the yuan is accepted as an international currency.

Hu's comments, which came ahead of a state visit to Washington on Wednesday, reflected the continuing tensions over the dollar's role as the major reserve currency in the aftermath of the US financial crisis in 2008.

"The current international currency system is the product of the past," Hu said in written answers to questions posed by The Wall Street Journal and The Washington Post.

Highlighting the dollar's importance to global trade, Hu implicitly criticized the Federal Reserve's recent decision to pump 600 billion dollars into the US economy, a move criticized as weakening the dollar at the expense of other countries' exports.

"The monetary policy of the United States has a major impact on global liquidity and capital flows and therefore, the liquidity of the US dollar should be kept at a reasonable and stable level," Hu said.

China's own currency, the yuan or renminbi (RMB), is also expected to be a bone of contention in Hu's talks with Obama, with the United States complaining that it is artificially undervalued to boost Chinese exports.

Asked about the view that appreciation of the yuan would curb inflation in China, Hu suggested that was too simplistic a formula.

"Changes in exchange rate are a result of multiple factors, including the balance of international payment and market supply and demand," he said.

"In this sense, inflation can hardly be the main factor in determining the exchange rate policy."

At the same time, Hu signaled no imminent move away from the dollar as a reserve currency, saying it would be a long time before the yuan is widely accepted as an international currency.

"China has made important contribution to the world economy in terms of total economic output and trade, and the RMB has played a role in the world economic development," he said.

"But making the RMB an international currency will be a fairly long process."

Nevertheless, Hu noted that China has launched pilot programs using the yuan in settlements of international trade and investment transactions.

"They fit in well with market demand as evidenced by the rapidly expanding scale of these transactions," he said.