Learn Chinese - Expert: China should limit pace of yuan rise

BIZCHINA / Worldwide Reaction

Expert: China should limit pace of yuan rise

(Reuters)
Updated: 2007-06-11 14:50

China should contain the pace of yuan appreciation within a bearable
range because a big rise would aggravate the country's overcapacity
problem, a prominent economist said in comments published on Monday.

The yuan has now gained a further 5.7 percent since it was revalued by
2.1 percent and freed from a dollar peg to float within managed bands in
July 2005.

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Last month, authorities widened the yuan's daily trading band against the
dollar to up or down 0.5 percent from its morning mid-point, compared
with 0.3 percent before.

But a big rise in the currency would reduce the country's exports and
subsequently worsen overcapacity in exporting sectors, Justin Lin, a
professor with Peking University, wrote in People's Daily.

Moreover, an increase in imports resulting from a stronger yuan would
displace some domestic products, exacerbating the problem of excess
production in those sectors, Lin said.

That would push some domestic manufacturers into bankruptcy and risk
fanning economic and financial crisis, he added.

"In developing countries with rapid growth, the government should send
clear-cut signals to the market to create stable expectations about
currency appreciation and keep the scale of strengthening within a
bearable range," Lin said.

Lin did not spell out how much of an annual rise would be appropriate,
but he has said in the past that a pace of 3 to 5 percent a year was
suitable.

His comments came even as the yuan fell sharply against the dollar on
Monday, extending last week's slide and erasing gains from a rally that
preceded Sino-U.S. trade talks in May, as the central bank applies the
brakes to the currency's ascent.

Lin also said the government should step up its macroeconomic controls by
employing a mix of tools, including industrial and fiscal measures, to
steer the economy into safe waters.

Monetary policy alone is not enough because the central bank is now
facing a dilemma in moving in interest rates, Lin said.

Increasing lending and deposit rates by the same margin would dampen
consumption, while raising the lending rate by more than the deposit rate
would give banks greater incentive to lend, he wrote.

China has raised benchmark interest rates four times since April 2006 and
increased the proportion of deposits banks have to hold in reserve on
eight occasions in the past year.

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