Feb. 4 (Bloomberg) -- China should let the yuan strengthen before raising interest rates, to avoid fueling inflows of capital that may stoke inflation, government economist Zuo Chuanchang said.
“Raising interest rates while keeping the yuan’s exchange- rate fixed would only attract more capital,” Zuo, of the Academy of Macroeconomic Research, said in a Feb. 2 interview in Beijing. Separately, state researcher Zhang Ming wrote in the China Securities Journal today that appreciation may resume as early as March.
Chinese officials aim to limit price surges that could undermine the recovery of the world’s fastest-growing major economy. The People’s Bank of China said last week that accelerating inflation will complicate policies in 2010 and central bank adviser Fan Gang said Feb. 1 that asset bubbles are “the real worry.”
Twelve-month non-deliverable yuan forwards fell 0.1 percent as of 9:47 a.m. in Hong Kong. The contracts reflected traders’ bets that the currency will gain 2.6 percent in a year.
Speculative Inflows
Consumer prices rose a more-than-forecast 1.9 percent in December from a year earlier and may climb 3 percent this month, according to Nomura Holdings Inc. Unprecedented growth in credit has driven the nation’s recovery from the financial crisis.
“Allowing the currency to move may help deter some of the speculative inflows, thus making monetary tightening measures more effective,” said Zuo, whose academy is an affiliate of the Beijing-based National Development and Reform Commission, the nation’s top planning agency.
China’s economy expanded 10.7 percent in the fourth quarter from a year earlier, the fastest pace since 2007. The Shanghai Composite Index climbed 80 percent in 2009 and declines this year have been driven by concern that monetary tightening may hurt profits.
“China’s strong recovery will continue to attract investors as well as speculative funds, so the liquidity pressure will keep building unless the government relaxes controls on the currency,” Zuo said.
Overheating Risk
In his newspaper column, Zhang, deputy chief of the International Finance Research Center at the Chinese Academy of Social Sciences, wrote that the yuan may gain as much as 5 percent this year as a rebound in exports adds to the risk of economic overheating.
China’s foreign-exchange reserves, the world’s largest, surged 23 percent to $2.4 trillion last year, government data show. Part of the buildup is from inflows of hot money, or short-term speculative capital, that has made the nation’s stock and property markets more volatile, central bank adviser Fan said on Dec. 28.
The central bank unexpectedly asked lenders to set aside more money as reserves on Jan. 12, the first increase since June 2008, after state media reported lending of about 100 billion yuan a day in the first week of this year.
The faster recovery of emerging economies and low interest rates in the U.S. and Europe will continue to drive liquidity to nations such as China, according to Fan, the academic member of the central bank’s monetary policy committee.
