China’s central bank said on Friday it aimed to keep the currency exchange rate relatively stable, but the pronouncement did little to quiet speculation that Beijing would allow swifter yuan appreciation to help stem inflation.
The People’s Bank of China (PBOC) said in a quarterly report that it would use “multiple policy tools” including interest rates, exchange rates and bank reserve requirements to try to keep prices in check. The wording in the report was similar to its previous one.
It repeated that it would keep the yuan exchange rate basically stable at a “reasonable and balanced level.”
However, talk swirled that the central bank was preparing a policy move. A flurry of stories in local newspapers affiliated with the government suggested that the PBOC would increasingly use a stronger currency to help it manage imported inflation as the US dollar weakens.
It was not clear whether the PBOC’s report was written before or after those stories were published on Friday. The report made a reference to the US debt rating downgrade on Aug. 5, indicating it was finalized within the past week.
“We will reasonably use price tools such as interest rates to adjust capital demand and investment/saving behavior to manage inflationary expectations,” the PBOC said.
It said there should be no let-up in the fight against inflation, indicating price pressures remained a primary concern even though many economists think inflation peaked last month.
“The foundation of stabilizing prices is still not solid enough, and the situation is not optimistic,” the bank said.
The media reports, which appeared in half a dozen newspapers in a rare display of uniformity, augmented market speculation that a PBOC policy change was imminent, perhaps involving a widening of the trading band for the currency.
The yuan steadied to around 6.39 to the dollar in spot markets on Friday, pausing after a steep rise last week, as the PBOC set a record-high mid-point for the yuan for a third consecutive day.
It has now appreciated about 6.7 percent since it was depegged from the US dollar in June last year and 3 percent so far this year.
YUAN’S CASE
Beijing routinely faces pressure from the IMF, the US and others to allow the yuan to rise more rapidly.
There are at least three reasons why a stronger currency would make sense for China now.
Data released last week showed inflation last month unexpectedly accelerated to 6.5 percent year-on-year, while exports held up well in the face of sluggish US and European economic growth. A stronger currency would help blunt imported inflationary pressures, and healthy exports suggest businesses can tolerate a rise.
The US debt downgrade and festering European debt crisis have renewed questions about China’s heavy foreign debt holdings. A strengthening yuan would slow the accumulation of reserves and reduce the need to recycle them into dollar or euro-denominated assets.
The US Federal Reserve’s pledge last week to keep interest rates ultra-low for at least two more years has heightened speculation that it may launch another round of bond purchases. The last round drove up commodity prices and sent a wave of speculative money into emerging markets, fanning inflation.
BNP Paribas economists said that a swifter yuan rise “looks logical” if China is sufficiently confident that its economy can weather a global economic slowdown.
“If, in doing so, it also means China reserves growth slackens off and so the need to continue acquiring so many Treasuries is reduced, then this sends an exquisitely timed signal to the US after last week’s ratings downgrade,” BNP wrote in a note to clients.
The Wall Street Journal argued in an editorial last week that Beijing’s monetary policy was “reaching its limit” because inflation kept rising while economic growth slowed.
It said the PBOC was running out of room to “sterilize” the rapid inflow of dollars by selling government bonds, and it would have to let the currency rise.
A senior official from the State Administration of Foreign Exchange told an export forum on Friday that the country still faces considerable pressure from capital inflows.
SINKING DOLLAR
The official China Securities Journal said that although the PBOC has not announced a change in its policy stance, it recently signaled a shift by slightly changing its language when it talked about future policy plans.
That suggests the central bank is ready to use the yuan as a key tool in managing imported inflation, the paper said.
“The dollar is likely to remain weak and would push up commodity prices in the long term, adding pressures of imported inflation for China,” the paper that is operated by Xinhua news agency said in a front-page editorial.
“A rise in yuan value will help to manage these risks,” it said, adding that China is likely to rely more on the yuan in future as a policy tool.
The Shanghai Securities News also reported in a front-page story that the exchange rate may play a leading role in China’s monetary policy controls.
Beijing has long resisted calls from the US and other trade partners for a more rapid appreciation of its currency, which they claim has been kept artificially low to make China’s export sector more competitive in international markets.
However, the weak yuan has also exacerbated the country’s efforts to contain the rise in its trade surplus and its stockpile of foreign exchange reserves, now the world’s largest.
The People’s Daily, the mouthpiece of the Chinese Communist Party, said on Friday that a faster rise in the yuan could ease price pressures in the short term and help develop China’s export sector in the long run.
“A stronger yuan will have an impact on the Chinese economy, but it won’t deal a heavy blow to China’s export sector,” the newspaper said in a story headlined “How to view the record highs of the yuan exchange rate.”
The International Business Daily, a newspaper published by China’s Ministry of Commerce, also cited domestic economists as saying there is growing pressure on the yuan to rise.
Ding Zhijie (丁志杰), a professor at the University of International Business and Economics in Beijing, said that now was a good “time window” for yuan reform, pointing to China’s swelling trade surplus as evidence that exporters could comfortably tolerate a stronger currency.
However, Li Jian (李健), a researcher with a think tank under the Ministry of Commerce, said China was likely to maintain its practice of allowing the yuan to rise gradually, perhaps 3 percent to 5 percent annually.
“China’s export sector well survived the yuan appreciation in past years because the appreciation is conducted in a gradual and modest way, and exporters have time to adjust,” Li said.
“But it could be another story if the exchange rate changes dramatically,” Li said.
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