CHINA / National

Cooling measures take hold; economy slows down
Updated: 2006-07-24 10:30

Yuan Gains

The yuan has gained 1.5 percent against the dollar since a 2.1 percent revaluation a year ago. That angers some US and European lawmakers, who accused the Chinese government is "manipulating" the level to keep exports cheap.

Chinese officials say they plan eventually to let the yuan trade freely on world markets but say there are no plans for sharp increases in the exchange rate.

At home, the Chinese government wants to reduce inequalities caused by a quarter century of economic growth that mostly benefited cities and led to a population of about 130 million rural workers dependent on employment in towns.

To keep the yuan stable, the central bank buys dollars, increasing the money supply and making it harder to control credit growth. The buildup of funds in the financial system encourages lending and fuels the investment boom that Premier Wen Jiabao calls the biggest threat to the economy.


Fixed-asset investment in China's towns and cities jumped 31.3 percent in the first half from a year earlier, accelerating from 30.3 percent in the first five months.

China's government agrees that it will have to find some way of rebalancing growth toward domestic consumption.

"An economic model that's based on excessive fixed-asset investments and exports is not sustainable," Zheng Jingping, a spokesman for China's statistics bureau said on July 18. China will strengthen controls to address "prominent problems" such as overinvestment, Zheng said.

The central bank raised its benchmark interest rate to 5.85 percent from 5.58 percent on April 28, making it more profitable for banks to lend by widening the gap between the lending rate and the deposit rate, which was kept unchanged. The rate will be increased by at least 25 basis points by Sept. 30, according to 19 of 21 economists surveyed by Bloomberg News July 18.

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