China Should Use Currency to Curb Inflation, Government Researchers Say

Two prominent Chinese state researchers added to calls for the government to use the yuan to help curb inflation that accelerated to a 32-month high in March.

“A moderate acceleration in the yuan’s appreciation would help China effectively deal with imported inflation”, Ba Shusong, a researcher at the State Council’s Development Research Center, said in Shanghai today. Wang Yong, a professor at the central bank’s training center, said policy makers should let the currency rise faster and widen its daily trading band by an “appropriate margin” in the second half of the year.

The two academics join a growing number of Chinese officials and academics who have this month highlighted how the yuan may aid efforts to curb inflation that is threatening social stability. Premier Wen Jiabao said last week that the exchange rate may play a role in reining in prices and deputy central bank governor Hu Xiaolian said more yuan flexibility would ease inflation pressure.

“Allowing faster appreciation of the yuan will be an important policy consideration in the next phase” of deciding how to tackle price increases as the cost of internationally traded commodities continues to surge, Wang wrote in a commentary published in today’s Securities Times. He opposed a one-off revaluation of the currency.

China’s crude oil shipments in the first quarter rose 12 percent by volume and 39 percent by value to $43.7 billion. The cost of iron ore imports jumped 82.5 percent to $27.7 billion while the amount of metal climbed 14.4 percent, customs data show.

Record Reserves

Policy makers may use foreign-exchange tools more frequently than in the past to tame inflation, Ba said today. China’s foreign-exchange reserves may climb to $4 trillion next year, which will force the central bank to drain liquidity more regularly, he said.

The nation’s foreign-currency holdings, the world’s biggest, rose by the second-largest amount on record in the first quarter to exceed $3 trillion, the central bank said April 14.

The room for China to raise interest rates will be limited if the U.S., Europe and Japan continue to maintain low rates, Ba said today.

The People’s Bank of China has raised borrowing costs and savings rates four times since mid-October. Its benchmark one- year lending rate is 6.31 percent and the deposit rate stands at 3.25 percent. The U.S. Federal Reserve’s benchmark interest rate stands at a range of zero to 0.25 percent.

Record Gains

Yuan forwards traded at the biggest premium to the spot rate in more than five months today. Twelve-month non- deliverable contracts rose 0.3 percent to 6.3235 per dollar as of 5:22 p.m. in Hong Kong, 2.9 percent stronger than the onshore exchange rate of 6.5067, according to data compiled by Bloomberg. That’s the largest gain projected since Nov. 11.

The Chinese currency is currently allowed to rise or fall as much as 0.5 percent against the U.S. dollar from a daily reference rate set by the People’s Bank of China. The rate was fixed at a record high of 6.5156 yuan today.

Yuan appreciation may alleviate pressure on the central bank to buy foreign currency, which would help ease excessive liquidity and curb inflation, Wang wrote today. The government at the same time should strengthen supervision of capital flows as yuan gains may attract hot money, thereby boosting liquidity and increasing inflation pressure, he said.

Xia Bin, an academic adviser to the central bank who also heads the financial research institute of the State Council’s Development Research Center, said this week that yuan gains will have a “certain impact” on easing imported inflation pressure although officials can’t rely on the exchange rate alone.

Export Orders

Still, he said current conditions aren’t conducive to overly fast gains.

The Ministry of Commerce said today there is “relatively large” pressure for the yuan to appreciate, which has had an impact on export orders. The ministry made the comments in a report on China’s foreign trade environment posted on its website.

--Zheng Lifei, Luo Jun, Victoria Ruan. Editors: Nerys Avery, Stephanie Wong.

To contact Bloomberg News staff for this story: Lifei Zheng in Beijing at +86-10-6649-7560 or lzheng32@bloomberg.net

To contact the editor responsible for this story: John Liu at jliu42@bloomberg.net PBCZ CH <Equity> CN %CNY

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