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China takes steps to curb its surging economy
May 31, 2007 on 9:11 pm | In Money |
HONG KONG: The Chinese central bank announced Friday that it would allow its currency to fluctuate more during daily foreign exchange trading, but again rebuffed demands from the United States and Europe for a sustained rise in the yuans value.
The central bank also raised interest rates and demanded that commercial banks set aside more of their assets as reserves that cannot be lent. The two moves are aimed at tightening credit and reducing the risk of overheating in an economy that is growing at more than 11 percent a year and in mainland Chinese stock markets that have more than tripled since the beginning of last year.
The currency announcement came as top U.S. and Chinese economic policy makers prepared to meet Tuesday through Thursday in Washington in an effort to head off growing complaints from the U.S. Congress to address the widening U.S. trade deficit. But the policy shifts, announced Friday and taking effect Saturday, are unlikely to have any practical effect on soaring Chinese exports, economists said.
The Peoples Bank of China said in a statement posted on its Web site that it would allow the yuan to rise or fall up to 0.5 percent in daily trading. The daily limit was 0.3 percent.
But the central bank gave a clear signal that the new policy should not be interpreted as Chinese willingness to allow a run-up in the value of the yuan. The bank said it would continue to “keep the exchange rate basically stable at an adaptive and equilibrium level based on market supply and demand with reference to a basket of currencies.”
The bank issued a separate statement quoting an unidentified spokesman as saying that the decision does not mean that the exchange rate “will see large ups and downs, nor large appreciations.”
The Peoples Bank has not allowed the yuan to move the maximum allowed percentage on any day since it broke the yuans peg to the dollar on July 21, 2005. The Chinese government allowed the yuan to rise 2.1 percent then, and has only let it inch up by another 5 percent over the nearly two years since then.
By contrast, members of the U.S. Congress from manufacturing states that have lost jobs during the Chinese export boom have been calling for China to revalue by 25 percent or more. If China were to allow the yuan to rise more quickly against the dollar, this would make Chinese exports more expensive in foreign markets and would make foreign goods more competitive in China.
Liang Hong, an economist at Goldman Sachs, said that the wider trading band represented “a symbolic, but laudable development in Chinas foreign exchange reform.”
Widening the daily trading band is the latest in a long series of steps by Chinese officials to gently awaken Chinese businesses to the risks that fluctuating currencies can pose. China pegged the yuan at 8.27 to the dollar from 1997 to 2005, lulling some businesses and entrepreneurs into ignoring currency risk.
In interviews last month at the Canton trade fair, in Guangzhou, exporters from all over China said that they were paying much closer attention to exchange rates. While Chinese export contracts are still denominated mainly in dollars, Chinese companies increasingly ask their foreign customers to agree to provisions requiring the buyer to pay extra if the dollar starts falling faster against the yuan.
Chinese officials have acknowledged that there are economic arguments for faster appreciation of the yuan, but contend that this could threaten what they describe as “social stability” - the risk that Chinese workers and farmers who lose their jobs as a result of currency appreciation might protest against the government.
Two-thirds of the population still lives in rural areas, and the agricultural sector is barely competitive with imports at current currency levels, raising the prospect of increased rural unemployment if the yuan were to rise sharply and food exports drop as a result.
The Peoples Bank of China raised the benchmark regulated rate for one-year bank deposits by 0.27 percentage points to 3.06 percent, and increased the benchmark rate for one-year bank loans by 0.18 percentage points to 6.57 percent. By raising deposit rates more than lending rates, the government showed confidence that the banks have put enough of their bad loan problems behind them to survive on slightly narrower profit margins.
The central bank also ordered banks to hold 11.5 percent of assets as reserves, up from 11 percent. Many banks already have even larger reserves, however, as they have been swamped with deposits from the brisk Chinese economic growth and large trade surplus, and have had trouble finding ways to lend this money.
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Swiss March trade surplus 718 mln sfr vs 1.381 bln in Feb »ZURICH (Thomson Financial) - Switzerland’s trade surplus narrowed to 718 mln sfr in March from 1.381 bln in February, the Federal Customs Office said. Exports in February rose a nominal 9.2 pct or a real and inflation-adjusted 7.7 pct to 17.15 bln sfr, while imports rose a nominal 13.3 pct or real 13.4 pct to 16.4 bln sfr, the office said. andrew.ge.thompson@thomson.com at/vs COPYRIGHT Copyright AFX News Limited 2007. All rights reserved. The copying, republication or redistribution...