China stays quiet amid talk of new financial order

By Alan Wheatley, China Economics Editor - Analysis

BEIJING (Reuters) - Just as it was never realistic to think China could single-handedly save the world economy, it's probably wise to tone down any expectations that Beijing somehow holds the key to a new international financial order.

Premier Wen Jiabao promised after talks among 43 Asian and European Union countries that China would actively participate in a November 15 summit that President George W. Bush is convening to rake over the global credit crisis.

China, which keeps its own markets on a tight leash, will presumably support any drive to keep a better check on new-fangled financial instruments and cross-border money flows.

"We need financial innovation, but we need financial oversight even more," Wen told a news conference on Saturday.

But Beijing shows scant interest in debating whether a wholly new monetary regime is called for -- whether, perhaps, the current crisis has its roots in the floating exchange rates that replaced the Bretton Woods system of fixed-but-adjustable rates, centered on the dollar, backed by gold and supervised by the International Monetary Fund, that collapsed in 1971.

"I don't think China can do much. Officials have said that what is important for China is to handle its own business well, which I think is quite right," said Zhang Bin with the Chinese Academy of Social Sciences, the government's top think-tank.

NO CHANGE

To be sure, Beijing regularly rails against what it sees as Washington's irresponsible stewardship of the dollar and against market volatility that endangers the stability that China craves.

But discussion of the crisis in Beijing is dominated by the risks for China of holding so many dollars in its reserves.

A senior EU official who attended the summit said Chinese policy makers have little to say when the question turns to overhauling the system that permitted those reserves, and the economic imbalances they mirror, to build up in the first place.

An official at the People's Bank of China ruled out a new international monetary order, while Zhang, who is a financial economist, called the idea "a load of rubbish."

"The basic global monetary system with U.S. dollar as the reserve currency will not change," he said. "China is not ready yet to inject substantial change into the system."

China has the world's fastest-growing economy, but its financial markets are not mature or open enough, Zhang said.

And crucially, he added, although it may be bought and sold for purposes of trade and investment, the yuan is not convertible for purely financial transactions.

This rules out a place for the yuan in central banks' foreign exchange reserves -- something that Thailand, for one, has said it would like to change so the yuan can become an anchor currency in Asia.