China to use yuan to help adjust imbalances

BEIJING - China will aim to slow growth in its foreign exchange reserves in part by increasing overseas investment, the central bank said on Wednesday.

By (Reuters)

Published: Wed 9 Aug 2006, 8:00 PM

Last updated: Sat 4 Apr 2015, 2:09 PM

In its second-quarter monetary report, the People’s Bank of China reaffirmed its policy of keeping the yuan at a reasonable and balanced level while improving its foreign exchange regime with an eye to bringing the country’s external payments into better balance.

“The foreign exchange rate can play a role in adjusting the imbalance in international payments to a certain extent, as part of a policy package,” the report said.

That combination of policies would have to include boosting Chinese domestic demand and lowering the savings rate. “You cannot purely rely on the appreciation of the yuan’s exchange rate to make this happen,” the report said.

Still, the dollar fell around 30 ticks against the yen after the comments raised expectations that Beijing will let the yuan rise more quickly.

“Basically they are saying they will use FX policy to solve global imbalances. They are moving towards further yuan appreciation,” said Bilal Hafeez, head of foreign exchange strategy at Deutsche Bank in London.

The yen, often traded as a proxy for the yuan, strengthened to the day’s highs of 114.83 per dollar from around 115.10 before the comments.

The report said there had been an increase in the flexibility of the yuan, which has risen 1.66 percent since it was revalued by 2.1 percent in July 2005 when China abandoned a dollar peg in favour of a managed float.

The bank said the currency had gained 0.94 percent against the dollar in the first half of the year.

The surge in China’s foreign exchange reserves to a world record $941.1 billion at the end of June has left the banking system awash with cash, providing the fuel for an investment-driven acceleration in annual GDP growth to 11.3 percent in the second quarter.

Policy adjustments

The central bank, which has raised interest rates once and banks’ required reserves twice since late April, acknowledged it still faced a tough task to slow credit growth.

The bank needed to lean on bill sales and reserve requirement rises as a way of mopping up excess liquidity and ensuring that monetary policy remained effective.

Interest rate rises in other countries, including the United States, had given China more room to adjust its own monetary policy and helped to reduce hot money inflows into the country, it said.

Global rate rises had also afforded China more breathing space as it proceeded with reforms of its yuan exchange rate.

The bank, which said China needed to rely less on investment and exports for its growth, forecast a slight slowdown from the first half of the year, when GDP expanded 10.9 percent from a year earlier.

While it described growth thus far as basically stable, it also pointed to outstanding problems in the economy, including heated fixed-asset investment, rapid loan growth and energy constraints.

More news from Business