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UPDATE 1-China faces hot money because of U.S. -c.bank adviser

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UPDATE 1-China faces hot money because of U.S. -c.bank adviser

Mon Oct 18, 2010 6:52am EDT

(adds quotes, background)

By Kevin Yao

SHANGHAI Oct 18 (Reuters) - China needs to bolster its capital controls to curb hot-money inflows because loose U.S. policies are pushing cash into Asia, an academic adviser to the Chinese central bank told Reuters on Monday.

Xia Bin, who is also a researcher in a think tank under the cabinet, said the dollar faced long-term downward pressure and that China was committed to eventually making the yuan a free-floating currency.

"The United States is implementing loose monetary policy, which is irresponsible and generating capital flows. That is why we are talking about capital controls in Asia," Xia said on the sidelines of a meeting of central bankers in Shanghai.

China already has one of Asia's most tightly controlled capital accounts, but the country's foreign exchange regulator has vowed to do even more to block hot money after signs in recent weeks of a rise in speculative inflows.

Flows to China are in part chasing yuan appreciation, and Xia said that Beijing would make the currency more flexible but only over time.

"A free-floating exchange rate is the long-term objective, but for now we should maintain a managed float and increase the flexibility and the trading band," he said.

China freed the yuan from a 23-month peg to the dollar in June and has let it gain about 2.7 percent against the dollar since then, with most of its rise coming after August.

U.S. and European officials have criticised the pace of appreciation as too slow, but Beijing won something of a reprieve on Friday when the U.S. Treasury Department opted to delay a decision about whether to label China a currency manipulator.

"This is because (U.S. President Barack) Obama's administration clearly notes that yuan appreciation will not resolve their problems," Xia said.

"In the long term, if the United States cannot find ways to boost its potential growth, the dollar will face big pressure," he added. (Editing by Ken Wills/Ruth PItchford)

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