China's central bank puts the brakes on

BEIJING - China's central bank reiterated the Government's intention to rein in the fastest economic growth in a decade by using measures including a more flexible exchange rate to make expansion less dependent on investment and exports.

The People's Bank of China said it "will take comprehensive measures to balance international payments" including expanding consumption, reducing the savings rate, increasing imports and "enhancing the flexibility of the yuan".

The remarks echo Premier Wen Jiabao's call last week for improvements in the exchange-rate mechanism as part of a package of measures to cool growth and damp a surge of money flowing into the world's fourth-largest economy. The Government is concerned that overheated growth will create excess capacity that could trigger a slump in asset prices and cause an abrupt slowdown.

"It appears that there's a consensus on the policymaking level," Wang Qing, head of economics and strategy for Greater China at Bank of America, said in Hong Kong. "They now recognise the importance of the currency in this overall package of macro tightening."

China is also under pressure from the US to allow faster appreciation after the bilateral trade gap widened 13 per cent to US$82 billion ($134 billion) in the first five months of this year. The US trade deficit with China shot to a record US$202 billion last year.

The yuan rose 0.06 per cent to 7.9707 on Wednesday in Shanghai, bringing gains to 1.7 per cent since China ended a decade-old peg to the dollar in July 2005, according to data compiled by Bloomberg. The central bank fixed the reference rate for yuan trading at 7.9762 against the dollar yesterday, weaker than Wednesday's close.

"There is a gradual acceptance of the fact that the economy can tolerate a faster appreciating exchange rate and you will see that happen in 2007," Glenn Maguire, chief Asia economist at Societe Generale in Hong Kong, said. "It will be appreciating at a faster pace than in 2006."

He forecasts the yuan will appreciate to 7.7 against the US dollar by the end of the first quarter of 2007 and to 7.5 by the middle of the year.

China expanded 11.3 per cent in the second quarter from a year earlier, the fastest pace since 1994, defying a series of economic and administrative controls aimed at cooling an investment boom that has contributed to record global oil and raw material prices.

The Government stepped up controls in the last two months, announcing seven sets of rules to curb real estate prices and twice increasing the amount of deposits banks must set aside as reserves.

The central bank in April raised its benchmark lending rate for the first time in more than 19 months.

- BLOOMBERG