China's central bank
reiterated the government's intention to rein in the fastest economic growth in
a decade and foreshadowed several measures, including greater flexibility in the
currency exchange rate.
The People's Bank of China didn't say when the changes would come or
elaborate on their nature in a story published yesterday by the state-run Xinhua
News Agency.
The yuan rose yesterday against the dollar, approaching the highest since a
July 2005 revaluation. U.S. Treasury Secretary Henry Paulson on Aug. 1 joined
Chinese officials in asking for faster gains to cool growth.
Premier Wen Jiabao is trying to prevent the expansion from triggering
inflation and ease pressure from U.S. politicians, some of whom are seeking
tariffs as a way of reducing the trade deficit and making Chinese products
appear less attractive. The government in the last two months announced seven
sets of rules to curb real estate prices, raised banks' reserve deposits twice
and is considering a plan to control foreign investments.
"They are making progress," said Donald Straszheim, vice chairman of Roth
Capital Partners LLC in Newport Beach, California. "The problems that confront
China now are primarily the result of their continued intervention in the
economy, by having decisions made by the government rather than allowing
decisions to be made by the invisible hand of the marketplace."
The yuan rose 0.06 percent to 7.9695 yesterday in Shanghai, bringing gains to
1.7 percent since China ended its peg to the dollar last year, according to data
compiled by Bloomberg.
Chinese Yuan
The one-month forwards contracts, which are agreements in which assets are
bought and sold at current prices for future delivery, show traders betting the
yuan will strengthen 0.3 percent to 7.9459 based on prevailing government
policy. It has risen an average 0.18 percent per month in 2006.
Paulson, in his first speech since taking over from John Snow a month ago,
said on Aug. 1 that China needs to show "more flexibility" by easing currency
restrictions. That echoed calls from People's Bank of China officials including
Yu Yongding, a policy board member, and Tang Xu, a research director, for a
stronger yuan.
U.S. Senators Charles Schumer and Lindsey Graham on July 26 told Paulson they
want to see the yuan strengthen by Sept. 30, or they will push ahead with
legislation to impose a 27.5 percent duty on Chinese goods.
China's trade surplus widened to an all-time high of $14.5 billion in June
from $13 billion a month earlier and the economy expanded 11.3 percent in the
second quarter, the fastest since 1995. The U.S. trade deficit with the mainland
rose to $17.7 billion in May from $17 billion the month before.
Equilibrium
The recent policy measures appear to have gradually taken effect, as the
trend of increasing credit growth has been slowed, according to the central
banks' statement on Xinhua.
The next step requires a stronger push to adjust the economy's structure,
boost domestic consumption, reduce the savings rate, increase imports, enhance
private-sector investments, make the foreign exchange rate more flexible and
adopt a basket of measures to help the balance of payment reach equilibrium, the
People's Bank said.
"They will accelerate the rate of crawl of the dollar- yuan," said Stephen
Jen, head of global currency research at Morgan Stanley in London. "More
currency flexibility will be an insurance payment against protectionist measures
targeted at China."
The currency may rise 5.9 percent to 7.50 against the dollar by the end of
this year, Jen said.
