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Flexible yuan to help in the inflation battle
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China's central bank said it will make the yuan more flexible and will use interest rates to curb inflation which is projected to remain "high" in the first half of 2008.

The yuan's appreciation is helping to temper import prices while exporters have shown a "higher-than-expected" tolerance to a stronger currency, the People's Bank of China said in a report yesterday. It did not give a forecast for inflation, which reached an 11-year high of 7.1 percent in January.

The yuan completed its biggest weekly gain this year and has risen 16 percent since the end of a fixed US dollar link in 2005, as the government tries to prevent the economy from overheating. China's economy grew 11.4 percent last year, the fastest pace in 13 years.

"The central bank needs to achieve a balance between growth and inflation," said Frank Gong, chief China economist at JPMorgan Chase & Co in Hong Kong. "The best way to curb inflation is to appreciate the currency faster and reduce import costs."

The yuan closed at 7.1418 per dollar as of 5:30pm yesterday in Shanghai, bringing its gain this year to 2.3 percent. The currency climbed seven percent against the dollar in 2007, more than double the gain for the previous year.

China will "boost the exchange rate's role in adjusting the balance of payments and in curbing inflation," the central bank said in the fourth-quarter monetary policy report. The bank "needs to carefully use interest rate tools to control the expansion of demand and stabilize inflation expectations," it said.

China has raised interest rates six times in the past year and boosted the percentage of deposits banks must hold as reserves to a record 15 percent. The benchmark one year lending rate is 7.47 percent.

Economic growth may slow "moderately" this year on "domestic and global uncertainties," the bank said in the report posted on its Website.

"As the subprime crisis causes persistent fluctuations to financial markets, aggravated by upward inflationary risks, central banks are in the dilemma of choosing between curbing inflation and maintaining necessary economic growth," it said.

Inflation may remain at a "high level" for "some time," driven by more expensive global commodities, domestic supply shortages and energy price reforms, the central bank said, adding that it is considering the introduction of a "core index" for inflation that excludes seasonal and international price factors.

China has resisted pressure from the United States and Europe for faster yuan gains on concerns a stronger currency would make the nation's exports less competitive, causing job losses.

(Shanghai Daily, February 23, 2008)

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