Economists seek to dampen yuan speculation

By (Reuters)
Updated: 2007-07-09 15:20

China should allow more volatile yuan trading, making the Chinese currency's long-term trends unpredictable in order to curb speculation that has undercut economic policies, two government economists said in a report published on Monday.

The government should also give up efforts to maintain a negative spread between the interest rates of the yuan and those for the US dollar because the gap has failed to cushion an inflow of speculative funds, according to the report by Xia Bin and Chen Daofu at the Development and Research Centre, a cabinet think-tank.

"Authorities should allow the yuan to rise sometimes quickly and sometimes slowly, with the pace of gains being irregular, to completely break the possibility for the market to predict the yuan's appreciation in certain times," they said in a rare, comprehensive report on China's liquidity.

"While these methods will be able to relieve pressure from expectations of yuan appreciation on economic policies, authorities should bring the yuan's exchange rate to a relatively reasonable and stable level for a period of time as quickly as possible," they said.

China is under heavy pressure from the United States and other parties to allow the yuan to appreciate at a faster pace, but it has said it will only allow the currency to rise at a pace in line with economic conditions.

The People's Bank of China has sought to curb speculative money from flowing into the country by keeping interest rates relatively lower than US rates.

But the economists said speculative funds have flown into China anyway, not because of expectations of a quick yuan appreciation but in search of returns from China's rising assets such as property and stocks.

"The rising asset value is caused by China's low interest rates, so further raising benchmark interest rates will help slow asset value growth and thus curb overseas hot money from flowing into the country," they said.

To fight excess liquidity, the central bank has raised the ratio of funds banks must hold in reserve eight times and has hiked interest rates four times in the last 15 months.

The report said China's financial reforms -- which led to a quick expansion of capital markets and more liquid money flows -- are the main cause of increasing liquidity. Many foreign economists have said the excess is fundamentally the result of China's huge trade surplus.

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