Mon, Sep 26, 2011 - Page 10 News List

Yuan rate relevant to BOP, China says

LEVERAGE:While China’s central bank governor said it was ‘too early’ to say how emerging economies might help the eurozone, Europe weighed increasing the EFSF

Bloomberg and AP, Washington

The yuan’s exchange rate is “highly relevant” to China’s international balance of payments (BOP), central bank Governor Zhou Xiaochuan (周小川) said, adding that a global economic slowdown would not normally affect currency policy.

The central bank considers the rate of the yuan to be determined by market activity and “based on the feedback of balance of payments data,” Zhou told reporters in Washington on Saturday, after the IMF meetings.

External conditions affect China’s currency rate policy “only in very specific situations,” he said, citing examples of the problems with US government-backed mortgage lenders Fannie Mae and Freddie Mac and the 2008 collapse of Lehman Brothers Holdings Inc.

“Otherwise, the international situation may be automatically reflected in the foreign-exchange market through market participants,” he said.

The yuan has strengthened 3.4 percent against the US dollar this year, the best performance among 25 emerging-market currencies tracked by Bloomberg. Chinese policy makers halted yuan gains for almost two years from July 2008 to help exporters weather a global financial crisis before relaxing controls on June 19 last year.

The yuan is expected to rise to 6.31 to the US dollar by year-end, up 1.2 percent from 6.39, according to the median of economists’ estimates in a Bloomberg News survey.

The yuan has gained 6.8 percent since resuming appreciation 15 months ago, as inflation last month rose 6.2 percent from a year earlier, after a jump of 6.5 percent in July.

“High inflation remains the top concern in China,” Zhou said in statement to an IMF meeting.

“We need to consider the time-lag effect. There’s no immediate way to bring inflation down,” he said, when asked about further measures to slow price gains.

The People’s Bank of China (PBC) has raised interest rates five times in the past year, boosted banks’ reserve ratios nine times and imposed restrictions on lending to help curb inflation that has exceeded the government’s target of 4 percent every month this year.

China’s central bank has multiple goals that include growth, employment and the international balance of payments as well as controlling inflation, Zhou told reporters.

China will probably handle the balance between a stable and relatively fast economic development, economic restructuring and inflation expectations, he said.

EUROZONE CRISIS

Separately, Zhou said it is “too early” to determine how emerging economies can further help the eurozone overcome its sovereign debt crisis because reforms are still under way.

“We need to first see if eurozone countries can implement their July 21 decision,” Zhou said, referring to a pledge by European leaders to expand the powers of a regional rescue fund.

He does not expect Greece will default on its debt and anticipates Europe will be able to overcome its crisis through reform, he said.

G20 finance chiefs pledged coordinated efforts to tackle rising risks this week as Greece teeters on the brink of default and stocks around the world plunged. Attention has focused on the potential for emerging economies to aid Europe as Japan and the US tackle their own debt burdens and sluggish growth.

“Some are studying and proposing to increase the size of the EFSF [European Financial Stability Facility],” Zhou said. “That needs to be done by the European countries.”

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