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
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.