China's policy to gradually let its currency gain value makes sense and a rush would damage both the Chinese economy and the world economy, said William J. McDonough, vice chairman of Merrill Lynch, on Thursday.

 

The Chinese government's decision to have the RMB yuan increase its value on gradual basis against the US dollar is quite understandable, he told a panel of the annual meeting of the World Economic Forum.

 

"In purely academic theory, the RMB yuan should be fairly stronger against the dollar. But we don't live in a purely theoretical world," he said in reply to a question on whether China has sensible responsibility on the health of the dollar.

 

He explained that with China's deepening participation in the world economy, China needs ultimately to open its capital account.

 

The Chinese government has realized the need and decided to do it gradually and carefully, an approach that also won approval of McDonough.

 

China's financial system dealt mainly with state enterprises 10 years ago. The system is getting complicated, but it is a gradual process before it is ready for the opening of the capital account, he said.

 

"If you completely open the capital account, it will be a brutal hit to a financial system, which, in my view, is not yet ready for it."

 

Given the high savings level in China, there could be a pretty significant capital counter-flow if the capital account is completely open, a scenario that, he said, is not in the immediate interest of the Chinese people.

 

"I think for the Chinese to go too fast would be a risk for the Chinese economy. And as such an important player in the world economy, I don't think that would be in the interest of the world economy, either."

 

He said the Chinese government's strategy to reform its capital account gradually and let the RMB reach its pure economic level in due course is a policy that makes sense.

 

(Xinhua News Agency January 26, 2007)