China will explore the possibility of setting up a dedicated India infrastructure development fund to strengthen its economic and trade ties with this country, a top official of The People’s Bank of China (PBC) told Financial Chronicle in an exclusive interview.

Referring to the proposal for a dedicated India fund, Ma Delun, deputy governor of the Chinese central bank said, “As central bank of China, we will support anything that is facilitating economic and financial cooperation between India and China."

India's trade with China is poised to cross $60 billion in 2010-11 from the projected $52 billion during the present financial year.

Elaborating on the proposed fund, Ma said: “Although we have the market demand and opportunity of cooperation, all participating parties should decide (on the proposed fund) after they evaluate the risk, returns and considering other businesses”.

Ma, who was on a week-long visit to New Delhi and Mumbai leading an 18-member delegation of Chinese bankers, regulators and industry representatives, did not elaborate on the size and investment of China's proposed India fund. Foreign exchange reserves-rich China has a $200-billion sovereign wealth fund, which makes strategic investments in overseas markets.

Ma said China would deepen and broaden exchange rate reforms ahead of aggressively pursuing its move to make Yuan an international currency.

Contrary to reports, the Peoples’ Bank of China might not be keen to buy gold from International Monetary Fund (IMF) unlike the Reserve Bank of India (RBI) that bought IMF gold worth $7.4 billion last month.

However, Ma indicated that the Chinese central bank would aggressively diversify its asset portfolio from that of the US greenback-dominated treasury investments.

From artificially fixing the exchange rate of yuan, the People's Bank of China will move towards making Chinese currency fully convertible on capital and savings account in a time-bound manner. The Chinese central bank will align value of yuan with top trading currencies of the world including, US dollar, euro and pound sterling.

“We have recognised the need to deepen exchange rate reforms. Yuan value has been appreciating after we initiated the currency reforms beginning 1994.”

However, the Asian financial crisis in 1997 put brakes on yuan appreciation. “This appreciation was hampered by Asian financial crisis in 1997. After the crisis, the Chinese international reserves were halved”, Ma said.

“Progress of currency reforms has been gradual based on our discussion with several experts including IMF to make Yuan fully convertible on all accounts” said Ma.

Artificially pegging yuan value against a basket of currencies has been a major issue confronting China’s trade ties with its partners like the US, Europe and even India.

Domestic power equipment producers like L&T, Bhel and tyre makers have recently petitioned the government on value of yuan pegged at low level giving their Chinese counterparts ‘undue advantage’. But, Ma said, it was not policy of Chinese establishment to push its exports by artificially fixing yuan rate.

“China never aims to improve competitiveness of our exports by depreciating yuan. It will never make our enterprises competitive that way. Fixing the value of currency to gain competitiveness in exports is like a slow process of suicide”, Ma said.

“We would like to encourage our entrepreneurs to compete on the basis of cost and quality of their products. And, this is the most important way of enhancing their competitiveness rather than depreciating the domestic currency”, he said.

While moving ahead with currency reforms, the Chinese establishment will quietly work towards making Yuan an acceptable currency for international trade.

“A country must be influential enough. Only then will its currency will be accepted naturally as an international reserve currency. Only then will it be acknowledged by everyone including all independent institutions, monetary authorities participating in international trade”, Ma said.

“After (the US-triggered) financial crisis, many countries are seeing the necessity of diversifying reserves. Now, some scholars in China and elsewhere are researching in establishing yuan as a super saving reserve”, he said.

The official position of Chinese monetary establishment, however, is one of stoic conservativeness of a communist regime. “We haven’t proposed to make yuan the international reserve currency. That has never been the official position,” Ma said.

When asked if China would buy gold from IMF to move away from US dollar denominated reserves, Ma said, “Security is top priority for China’s international reserves. And, we have always been advocating and implementing diversification of reserves. If you see our portfolio or reserves, you can see it is not a single currency or single asset (which we rely upon)”.