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China Fends Off Pressure on Yuan, Keeps Gradual Gain

Yi Gang, deputy governor of the People's Bank of China
Yi Gang, deputy governor of the People's Bank of China. Photographer: SeongJoon Cho/Bloomberg

China countered mounting pressure from major trading partners for a stronger yuan as central bank Governor Zhou Xiaochuan highlighted a domestic unemployment rate he estimated at more than 9 percent.

A “very fast” appreciation probably wouldn’t bring balance to the world economy, Zhou said yesterday in the U.S. capital. China’s central bank is balancing inflation, growth, fiscal policy, the international balance of payments and the “sensitive issue” of unemployment, he said.

Debate about competitive devaluations dominated meetings of finance ministers and central bankers gathered for meetings at the International Monetary Fund. China faces demands from Western nations to let the yuan rise more quickly at a time when the U.S. is trying to trim its trade deficit and European nations are trying to stem an outflow of manufacturing jobs.

Billionaire investor George Soros called for China to let its currency appreciate by 10 percent a year against the dollar to help address the global economic imbalance, saying a failure to act on the currency would mean “the current system is liable to break down and other countries will be driven to capital control.” Soros made the comments in an interview with Emerging Markets magazine.

‘Nasty Proposals’

For the Chinese government, any such action would be economically and politically difficult. Punitive measures on China to push for a faster appreciation are “nasty proposals,” Li Daokui, an adviser to the People’s Bank of China, said in Washington. The Chinese currency has risen “pretty fast” in recent months, he said.

China aims to cut its trade surplus to less than 4 percent of gross domestic product within five years, from 11 percent in 2007 and 5.8 percent in 2009, said Deputy Governor Yi Gang.

“We are committed to a more flexible exchange regime,” Yi said. “A more flexible, market-based, managed floating regime is better for China and is better for the rest of the world. But the approach is probably a gradual one.”

Yi said criticism of China is undeserved because the government in Beijing has allowed the yuan to appreciate more than 20 percent in the past five years.

Global governments tasked the IMF with calming the recent outbreak of tensions over currencies amid signs they are already triggering a protectionist backlash.

Interest Rates

China is in no “hurry” to reduce overall inflation and will focus on pushing down housing prices to strengthen the economic recovery, Zhou also said in Washington. It may take two years for the inflation rate to fall below 3 percent, from a 22-month high of 3.5 percent in August, he said

“Since the fiscal and monetary expansion has already got into effect, we cannot be very hurry to get inflation under control,” said Zhou, speaking in English. “We have a medium-term plan. I hope this medium-term plan is credible.”

Zhou’s comments buttressed economists’ median forecast in a Bloomberg news survey last month for the central bank to keep benchmark rates on hold this year. To rein in growth in money supply, the PBOC has ordered lenders to set aside more cash as reserves and targeted a 22 percent reduction in new loans this year.

While China reported an urban unemployment rate of 4.2 percent at the end of June, that number excludes millions of migrant workers.

Zhou said that the overall jobless rate is more than 9 percent; “always something around that, but after the financial crisis it becomes a more sensitive issue.”

Premier Wen Jiabao said Sept. 22 that excessive gains by the yuan could lead to “major social upheaval” in China as factories went bankrupt and migrant workers returned to the countryside.

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