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Yuan Under Pressure in Rate Clinch

Economists in Shanghai are calling on China's central bank to rethink the decision not to cut interest rates on domestic currency bank deposits following the US Federal Reserve's 11th interest rate cut this year.

"In theory, slashing the yuan interest rate might be desirable for the moment," said Zhou Li, a researcher at Shanghai-based China Foreign Exchange Trade System. "A strong yuan will hurt China's overseas shipments because it makes China's commodities expensive in other major markets."

Interest rate cuts boost lending, putting more currency into the market and pushing down the value of the yuan - although the currency couldn't drop too far as China ensures the yuan trades in a very narrow range compared with the US dollar, said local economists.

US Federal Reserve policymakers lowered the rate by 0.25 percentage points to 1.75 percent on Tuesday. Calling signs of a rebound "preliminary and tentative," the Fed signaled another rate cut is possible as early as next month.

"They're setting the stage for an eventual recovery," said Rajeev Dhawan, director of the Economic Forecasting Center at Georgia State University in the US "If they had seen real signs of abatement, they wouldn't have cut today."

Local economists don't expect the US cut to have much effect.

"I doubt how much the cut will help bail out their economy," said Huang Zemin, a professor of international finance at East China Normal University, indicating that the domestic export community doesn't pin much hope on a recovery in the world's largest economy any time soon.

Early this week, Dai Xianglong, governor of the People's Bank of China, or the central bank, dampened expectations of a similar move in China although calls for a rate cut were getting louder at that time in the country.

The Chinese Yuan's interest rates are under pressure to be further reduced under the global economic downturn especially after the September 11th terrorist attacks in the United States, the central bank said last month.

"Most major economies in the world are loosening their monetary policies to stimulate their downward national economic development and to alleviate the negative influences that the terrorist attacks in the US may have on them," the central bank said in a statement.

Though China's exports rose last month at the fastest pace in seven months, analysts see it a temporary rise rather than a recovery.

Overseas sales rose 8.1 percent from a year earlier to US$24 billion after rising 0.1 percent in October, according to customs figures.

An insider at a large local financial service firm who spoke on condition of anonymity told Shanghai Daily, "Judging from the economic data on our hands, a rate cut is underway."

Some analysts wonder if Dai's earlier statement was misrepresented by media.

"Did the governor say what he meant," asked an official at Guotai Fund Management Co. who declined to be identified.

Despite Dai's statements, analysts expect a rate cut to fuel the national economy, which is showing signs of decline.

China's industrial output rose 7.9 percent last month, the slowest growth this year.

"A rate cut appears to be one of the most efficient ways to stimulate spending," said Wu Yuanqing of HSBC's Shanghai branch.

During the January-to-November period, domestic banks' individual Chinese yuan-denominated deposits increased 801.9 billion yuan (US$96.6 billion), 388.3 billion yuan more than a year earlier.

The outstanding value of M1, a measure of money supply that adds demand deposits to cash in circulation, stood at 5.7 trillion yuan by the end of November, up 11.4 percent from a year earlier.

(eastday.com December 13, 2001)

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