CHINA / National

PBOC to keep currency stable
By Zheng Lifei (China Daily)
Updated: 2006-08-10 06:29

China cannot rely solely on currency appreciation to balance its external payments, the central bank said yesterday.

"As part of a policy package, the exchange rate can play a certain role in adjusting the imbalance in international payments," the People's Bank of China said in its second-quarter monetary report released yesterday.

"But the fundamental way to resolve the international payment imbalance should come from expanding domestic demand and lowering the savings rate."

The central bank, while noting the increasing flexibility of the yuan in the past year, reaffirmed yesterday that it would keep its currency at a reasonable and balanced level.

"We will further improve the foreign exchange regime in an active, controlled and gradual manner and keep the reasonable and balanced exchange rate (of the renminbi) basically stable," the central bank said in the report.

The yuan, which had gained 0.94 per cent against the dollar in the first half of the year, has appreciated an accumulated 3.76 per cent since last July when it was revalued by 2.1 per cent.

The central bank is also considering expanding overseas investment as a way to slow the rapid growth in foreign exchange reserves.

"(The country) should push forward the policy shift from stockpiling foreign exchange reserves in State coffers to letting businesses and residents hold more foreign currency and encourage the shift from State-led overseas investment to private overseas investment," the central bank said in the report.

China's foreign exchange reserves, driven by the ballooning foreign trade surplus and foreign investment inflow, had shot up to US$941.1 billion by the end of June.

China's foreign trade surplus rose to a record monthly high of US$14.5 billion in June, a rate that is unlikely to fall in the coming months.

The figure reportedly hit a record US$14.61 billion in July.

The soaring foreign reserves, already the world's biggest, are a major factor behind the robust money supply and credit growth in the first half of this year, economists said.

"The policy outlined in the report fairly reflects the reality on the ground," said Wang Cheng, a research fellow with the Institute of Economics at the Chinese Academy of Social Sciences.

"It acknowledged the need for further reform of the foreign exchange regime but also identified the current export-led economic growth model as the root cause of the huge international payment imbalance," Wang said.

The central bank said it will take "a mixed set of monetary tools" to control a sound credit growth in the next half of this year, acknowledging that both the money supply and credit growth were "too quick" in the first half of this year.

The M2, a broad measure of money supply that covers cash in circulation and all deposits, had risen 18.43 per cent year-on-year to 32.28 trillion yuan (US$4.03 trillion) by the end of June.

The central bank had set a growth target of 16 per cent for its M2.

Outstanding local currency loans in all financial institutions stood at 21.53 trillion yuan (US$2.69 trillion) by the end of June, up 15.24 per cent year-on-year, the central bank said.

The central bank acknowledged that slowing credit growth "will be a tough task."

(China Daily 08/10/2006 page9)


Related Stories