Advisor: China needs stable yuan to fight hot money

Updated: 2008-03-24 09:28

China needs a relatively stable exchange rate and should not use another one-off currency revaluation to curb inflow of overseas speculative capital, Fan Gang, an adviser to the central bank, said in remarks published on Monday.

"In order to reduce the inflow of speculative money and prevent speculation on a bigger magnitude, China is in greater need of a relatively stable exchange rate policy," Fan was quoted as telling a weekend forum in Beijing.

Fan opposes the use of another one-off revaluation of the Chinese currency, or yuan, according to the Shanghai Securities News. Widespread expectations that the yuan would register further sharp gains against the dollar have been encouraging inflows of speculative money into the country.

The yuan has risen a further 14.97 percent against the dollar since it was revalued by 2.1 percent to 9.11 on July 21, 2005. This year alone, the yuan has risen about 3.6 percent against the dollar.

More overseas speculative capital is expected to flow into China in 2008 and next year as a result of the US subprime mortgage crisis, which has sharply driven down the US interest rates and the value of the dollar, Fan was cited as saying.

The credit crisis would drive more capital to high-growth countries such as China and India, he said, adding that it remained a key challenge and priority for China to resolve the problem of excessive liquidity in its banking system.

Fan was also quoted as saying that China's high inflation was fuelled primarily by rises in international oil and grain prices rather than by domestic demand.

The Chinese government should bear this in mind when formulating its monetary policy, he said.

The sharp drop in China's trade surplus in February was mainly caused by Beijing's monetary tightening instead of weakening external demand, Fan noted.

China's trade surplus in February shrank to $8.56 billion from $19.5 billion in January and $23.8 billion a year earlier, as imports surged and exports sagged.

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