Sat, Apr 07, 2007 - Page 11 News List

Beijing to allow greater flexibility for yuan rate


China will improve the flexibility of the exchange rate of its currency this year and let market forces play a bigger role in deciding the yuan's value, People's Bank of China Assistant Governor Yi Gang (易綱) said.

"Small-scale" fluctuations in the yuan since the end of its decade-old peg to the US dollar in July 2005 were "appropriate," Yi said in an undated interview posted yesterday on the government's Web site.

China is under pressure from trading partners such as the US to let the yuan appreciate faster.

"The yuan's appreciation is too small," said Xiao Minjie (肖敏傑), a senior economist at Daiwa Institute of Research in Shanghai. "Investment is still so big and exports aren't falling. It's probably about time that China [widens] the yuan's trading band."

China revalued its currency by 2 percent in July 2005 and ended a decade-old peg to the US dollar. The currency was then allowed to trade up to 0.3 percent on both sides of a so-called central parity that is set daily.

"Small-scale" fluctuations in the yuan since the reform were "appropriate," Yi said in the interview, which was undated and posted on the Web site yesterday. The Chinese government will "improve foreign exchange management" while strengthening its monitoring of short-term capital flows, he said.

The central bank will also curb excess liquidity in the banking system to ensure "reasonable" loan growth, Yi said.

"Inflation pressure cannot be neglected," he said.

On Thursday, China raised the amount that banks must hold rather than lend to 10.5 percent of deposits, the sixth increase in 10 months, in an aim to control price increases and curb investments in the world's fastest-growing major economy.

The announcement of a 0.5 percentage point reserve ratio increase, to take effect on April 16, came several weeks earlier than many in the markets had anticipated, but was no big surprise.

"It's earlier than expected, but it's still a continuation of the central bank's stated monetary policy," said senior analyst Fang Ming (方明) at Bank of China in a research report yesterday.

The central bank's impatience implies that China's March trade surplus, credit, investment and consumer price data might all remain at high levels, Fang said, adding that inflation could be near 3 percent, up from 2.4 percent in the first two months of the year.

The central bank has raised the reserve requirement six times since last June, while official interest rates were increased twice during that period.

Goldman Sachs economist Liang Hong (梁紅) said, however, that the effects of the bank reserve hike would be short-lived.

"We do not expect it to have much impact on the real economy or the financial markets," Liang said in a research note.

"We reiterate our view that an interest rate adjustment would be a more credible tightening measure given the strong incentive and repaired capability of commercial banks to lend," she said.

The yuan hit 7.7236 to the US dollar in early trade yesterday, its strongest level since July 2005. The previous high was 7.7240, set on Thursday. The currency ended at a record high of 7.7220 against the US dollar, up from Thursday's finish at 7.7245.

"Banks will be preparing money for extra reserves," said a Shanghai dealer at a European bank. "But the hike's long-term impact on the yuan's exchange rate will be limited."

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