Friday, March 7, 2008

Central Banker Dismisses Prospect of Yuan Surge

BEIJING -- China's central-bank governor said a stronger currency isn't the best or only way to fight inflation, countering widespread expectations that the yuan's gains will accelerate as the nation's prices rise at their fastest pace in more than a decade.

"Faster currency appreciation helps to rein in inflation, but not a lot," Zhou Xiaochuan, governor of the People's Bank of China, told reporters on Thursday. "To curb inflation, we will rely more on domestic policies....There is no need to use exchange-rate reforms as a way to fight inflation.

Mr. Zhou's statements were unusual because the central bank is widely seen as an advocate of a stronger currency, a policy that is disliked by exporters and often has been opposed by other parts of the Chinese bureaucracy. Indeed, in its October monetary policy report, the People's Bank of China wrote that "Theoretical economic analysis and the experience of many countries both show that an appreciation of the currency helps contain domestic inflation."

China has pushed up the yuan at a faster rate against the dollar since inflation first surged above 3% in March last year. The Chinese currency rose 4.2% against the dollar in the second half of last year alone, and is up a further 2.6% this year. (Because the dollar is falling against other currencies, the yuan is down 1.9% against the euro this year.)

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