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Let the yuan rise, World Bank tells China

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1 Let the yuan rise, World Bank tells China on Thu Mar 18, 2010 2:35 pm


Published March 18, 2010

Let the yuan rise, World Bank tells China

Govt's stance on the currency has been consistent and is unchanged, says Beijing official

(BEIJING) The World Bank yesterday urged China to let its currency rise to contain inflation and stop the economy from overheating, predicting that growth will gallop ahead at 9.5 per cent this year. 'Strengthening the exchange rate can help reduce inflationary pressures and rebalance the economy,' the World Bank said in its latest quarterly update on the world's third-largest economy.

China is facing growing international pressure, particularly from the United States, to let the yuan appreciate. It has been effectively pegged to the dollar since mid-2008.

US senators on Tuesday introduced legislation that would impose tough new penalties on China if it failed to revalue its currency, which they say Beijing keeps artificially low to secure an unfair edge in trade.

The US action follows Chinese Premier Wen Jiabao's insistence at the weekend that Beijing would resist any foreign pressure for a stronger yuan, currently pegged within a narrow range of about 6.8 to the US dollar.

'Inflation expectations can be contained by a tighter monetary policy stance and a stronger exchange rate, while monetary policy also has a key role to play in containing risks of asset price bubbles,' the World Bank said.

The bank projected China's gross domestic product would surge 9.5 per cent this year, markedly higher than the government's own target for 2010 of around 8.0 per cent and the 2009 growth rate of 8.7 per cent.

Recovering demand for Chinese exports and robust real estate investment will be the key drivers of the economy this year as massive government-backed spending slows, it said. While inflation risks remained modest, the bank said containing inflationary expectations, reining in property prices and keeping local government debt 'manageable' were key tasks for policymakers.

'We do think it is important to contain this risk of (property) price rises and tightening overall monetary conditions will have to be part of that,' World Bank senior economist Louis Kuijs told a Beijing press conference.

China's remarkable recovery from the global crisis - its economy grew 10.7 per cent in the fourth quarter of 2009 - has been backed by US$586 billion in stimulus spending and massive state-sanctioned lending in 2009. Beijing is now clamping down on lending to calm inflationary pressures, fearing asset bubbles and economic overheating as well as a surge in bad debts.

Policymakers have twice this year increased the amount of money banks must keep in reserve - effectively limiting how much they can lend - and increased interest rates on benchmark three-month and one-year treasury bills.

But the World Bank, which provides financial and technical aid to developing nations, said higher interest rates and a stronger yuan would also help reduce inflationary pressures and rebalance the economy. 'The monetary policy stance needs to be tighter than last year and the case for exchange rate flexibility and more monetary independence from the US is strengthening,' it said.

World Bank lead economist Ardo Hansson said at the press conference a stronger exchange rate was 'part of the arsenal' in tackling inflation.

Mr Wen said on Sunday at a press conference the global slowdown continues to pose risks to China and that Beijing must keep its economic policies stable. 'We will maintain the continuity and stability of our policies,' Mr Wen said, adding that as circumstances change, Beijing would make every effort to make such policies 'more flexible'.

Separately, China said yesterday it 'could not be any clearer' in its repeated commitment to a stable exchange rate after the US Congress threatened to levy duties on some Chinese exports if it fails to revalue its currency.

The temperature in the long-running dispute over China's exchange rate regime is rising quickly, with a bipartisan bill introduced on Tuesday in the US Senate that aims to get Beijing to let the yuan rise.

Focusing on the yuan will not help to solve problems in the Sino-US bilateral trade relationship, a Chinese Commerce Ministry official told Reuters. 'We oppose the over-emphasis on the yuan's exchange rate,' the Chinese official said, when asked about the bill.

The Chinese official, who spoke on condition of anonymity, said that the government's stance on the yuan had been consistent and was unchanged.

The official cited Premier Wen and Commerce Minister Chen Deming, who have said that a stable yuan has contributed to both the Chinese and global economic recovery. 'We have repeated ourselves multiple times. And we cannot be any clearer,' the official said.

The Chinese Commerce Ministry official rejected the argument that the country's yawning trade surplus with the United States and broader global economic imbalances were due to the yuan. 'Focusing on the yuan's exchange rate is not an effective way to address trade issues between China and the United States,' the official said. 'The yuan's exchange rate is not a magic potion for solving global economic imbalances.'

The official repeated the Chinese government's long-standing position that the US could expand its exports to China by lifting restriction on the exports of high-tech products.

Meanwhile, International Monetary Fund (IMF) managing director Dominique Strauss-Kahn said yesterday that the Chinese yuan is 'very much undervalued', adding to growing global pressure on China.

'The renminbi (yuan) is very much undervalued and it's in the logic of rebalancing (of the world economy) that the renminbi will appreciate,' the IMF head told the European parliament's economic affairs committee in Brussels.

'It cannot be avoided, in some cases exchange rates have to appreciate, and that's the debate which is very well-known about China and the value of the renminbi,' he told the assembled members of European Parliament. -- AFP, Reuters

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