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PRC should not loosen control of yuan: official

"The last thing we want to see is trade protectionism, which does nobody any good."

Tang Xu, People's Bank of China research head

China has no need to broaden the trading band of its currency, and appreciation of the currency alone is unlikely to solve its trade surplus issue with the US, a central bank researcher said.

"There is no need" to broaden the floating range of the yuan, as the Chinese currency is known, Tang Xu (唐旭), research head of the People's Bank of China, told reporters on Saturday in Beijing.

The yuan is "not yet pushed to the end" of the trading band, he said.

It is allowed to trade up to 0.3 percent on both sides of a so-called central parity.

China is under pressure from trading partners such as the US to broaden the yuan trading band and allow the currency to appreciate faster. US lawmakers, vexed by a record US$232.5 billion trade deficit with China, have criticized what they call the nation's weak currency, subsidies and other unfair trade practices.

The exchange rate of yuan is not a solution to reducing China's trade surpluses, Tang said.

The currency "has been appreciating, but our trade surplus has also been growing," he said.

China in July 2005 ended a decade-long 8.30 yuan link to the dollar, letting the currency move in reference to a basket of currencies including the euro, yen, British pound and South Korean won. The currency strengthened about 1 percent in the first quarter and 6.9 percent since July 21, 2005.

Tang called the US imposition on Friday of tariffs on imports of Chinese coated paper an "unnecessary" move, adding that China has been cutting export rebates, which "to some extent" reduces the US trade deficit with China.

The US Commerce Department, reversing more than two decades of practice, decided on Friday to levy countervailing duties on Chinese coated paper to compensate for alleged Chinese subsidies to exporters. The change of policy opens the way for steel, textile and other US manufacturers to apply for the same protections.

The US and China should strengthen dialogue in seeking ways for development, Tang said.

"The last thing we want to see is trade protectionism, which does nobody any good," he said.

US tariffs cost its consumers more and have a "very negative" impact on global trade, he said.

Still, China faces the challenge of dealing with pressures for a stronger yuan, Tang said.

"We hope there weren't strong expectations, but it's very difficult to make them disappear," he said. "It's a big problem we are facing."

China may use a combination of monetary policy tools this year to absorb excess liquidity in the financial system, Tang said.

Further interest rate increases, higher bank reserve requirements and more central bank bill issuance are among policy options, he said.

China faces higher inflationary pressure this year, but will have no problem meeting the target of capping consumer price increases at 3 percent, he said.

A research report by his bureau forecast China's consumer price index will grow by 2.35 percent this year, he said.

An interest rate increase on March 18 served as a signal to the market that "the central bank believes there is too much liquidity" and market participants need to be more cautious, he said.

The interest rate differential between US and China isn't a constraint on China's room to raise interest rates, Tang said.

Higher interest rates in China will not trigger significant inflows of speculative capital, he said, citing China's capital controls and the partial convertibility of the Chinese currency.

"Arbitrage is very difficult," he said.
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