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China c.bank says yuan not key to inflation fight
2008-03-06
A stronger yuan can help temper price pressures but plays second fiddle to monetary policy in China's struggle against inflation, the country's central bank chief said on Thursday. Zhou Xiaochuan, governor of the People's Bank of China, also said that steep U.S. rate cuts would not stop Beijing from moving in the opposite direction and raising rates to cap consumer price inflation, which hit an 11-year high of 7.1 percent in January. Since China announced it was shifting to a tight monetary policy in December, the yuan has appreciated at an annualized rate of more than 15 percent, feeding market views that the country would lean on a stronger currency to cool its sizzling economy. "The exchange rate should not be a key measure in fighting inflation," Zhou told a news conference during China's largely rubber-stamp annual parliament. "For China, with a 1.3 billion population, controlling inflation should rely mainly on domestic policies, namely monetary tightening," he said. Beijing has resorted to a mix of tools -- raising commercial banks' reserve requirements, mopping up liquidity through open-market operations, raising interest rates and imposing credit quotas -- to tighten monetary conditions. But some economists have said that after six increases last year, China's freedom to raise interest rates further had been limited by successive cuts in the United States as the Federal Reserve tries to counter a credit crunch and housing recession. A sharp narrowing in the rate gap between the two countries has raised the specter of hot money inflows into China, a major worry of officials in Beijing. Asked if rates could be raised again, Zhou said: "I am sure there still is room. Of course, U.S. rate cuts have an impact on China's interest rate decisions, but they are not the only consideration. There are also domestic factors." CAPPING INFLATION Zhou said the central bank also had to bear in mind that high rates would sap household spending, while low rates could drive more money into equities. Savers withdrew money in droves last year from low-yielding bank accounts and poured into stocks, causing a bubble that has been deflating since mid-October. Glenn Maguire, an economist at Societe Generale in Hong Kong, said the speedy yuan appreciation of recent months could peter out later this year. "We believe that policy will very likely follow a path of promoting a faster pace of gains now, which will then be followed by a moderated pace within a wider trading band, likely in the second half of the year," he said in a research note. Ma Kai, China's top economic planner, sounded a note of optimism about the prospects of capping inflation this year at 4.8 percent, a target set on Wednesday by Premier Wen Jiabao. "We are determined to do so. We have the right conditions and we have the right measures," Ma, head of the National Development and Reform Commission, said at the same news conference as Zhou. After five years of economic growth topping 10 percent and low inflation -- a combination rarely seen in global economic history -- price pressures in China began to surge last year, driven by soaring food costs. Complaints from ordinary people struggling to pay their grocery bills have unnerved a government that is obsessed with maintaining social stability. "There are still problems with the current state of the economy," Ma said. "Investment is growing too fast, the supply of credit is still too high and the trade surplus is still excessive." (Reporting by Eadie Chen, Jason Subler and Zhou Xin; Writing by Simon Rabinovitch; Editing by Ken Wills)
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