The value of the yuan will remain stable in the next 12 to 18 months despite the pressure to urge the Chinese currency to appreciate faster in the wake of the nation's ballooning trade surplus, an economist said.

In the tug of war between yuan appreciation and soaring trade surplus, China may lean on a stable currency to avoid a sudden decline in the competitiveness of its exports, thus to create more jobs, Phillip Poole, the global head of emerging market research and chief emerging markets economist at HSBC, told China Daily.

"China's labor pool is experiencing the biggest economic shift in generations from agricultural to manufacturing," Poole said. In order to stimulate jobs for the country's enormous population, he expects the yuan will not appreciate too fast.

However, keeping a lid on the rise of the yuan will come with a swelling trade surplus, he said.

From January to September, the country has already recorded a US$187 billion cumulative trade surplus, more than 5 percent over US$177.5 billion for all of 2006.

Despite repeated calls from the US to let the yuan appreciate faster, a senior Chinese official confirmed last week that the gradual approach is the way that has been favored.

The assistant governor of the People's Bank of China had said that gradual appreciation of the yuan is more balanced and appropriate than a one-off revaluation of the currency.

"The fluctuation of the yuan should be small-scale, gradual and based on market demand and supply," Yi said at an academic forum held in Hong Kong last week.

'An impossible trinity'

Curbing inflation and cooling the sizzling economy also top the Chinese government's agenda. The inflation barometer, consumer price index (CPI), eased to 6.2 percent in September after hitting an 11 year high of 6.5 percent a month earlier. Meanwhile, A shares and property asset prices continue to climb rapidly, outstripping the pace of inflation.

"A bubble has already formed," Poole said.

Despite the wave of cool-down measures, the Chinese economy continued its bullish run. Poole said the center of the situation lies in the impossibility to control currency, tame inflation and allow huge capital influx at the same time.

"It is an impossible trinity," said Poole. "China is trying to do all three. But in the long run something has got to give."

Poole said if the government chooses to control the exchange rate and keep inflation in check it must restrict the capital influx and facilitate residential capital outflows.

A pilot project, which has been dubbed by the media as "capital direct train" and will give mainlanders direct access to Hong Kong stocks, is widely seen as an attempt to channel some liquidity out of the mainland. The anticipation of the northern capital has been driving the Hang Seng Index to smash record highs.

Poole believes that the Chinese government will eventually have to stall the rise in asset prices and to signal to investors that stocks and properties are not a one-way bet.

"People need to know that they will lose money," said Poole. "The government can be more aggressive in its response by putting a tax on each transaction and introduce volatility into price actions." However, he expects the cool-down measures will remain mild until the 2008 Olympic Games are finished.

(HK Edition 10/29/2007 page5)