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Capital Account to Open Further: PBOC
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China will continue to liberalize its capital account, but it is necessary to control the pace at which it is opened, Yi Gang, assistant governor of the People's Bank of China, told a financial forum on Friday.

"China will resolutely push for the opening of the capital account, which is always a set agenda," he was quoted by Bloomberg as saying. "But we need to control the pace of the opening in an orderly manner."

Mainland people were allowed on Monday to directly trade stocks in Hong Kong for the first time under a pilot program started in Tianjin's Binhai New Area.

Tianjin's Binhai New Area

Analysts expect the program to expand to more cities and individual investors to be allowed to invest in more international markets.

"It opened a small window for outbound individual investment," said Yi Xianrong, an economist with the Chinese Academy of Social Sciences. "The window is set to be opened wider."

But Yi Gang warned that managing the capital account could be difficult because many foreign-exchange inflows are mixed with money remitted back to China by overseas Chinese.

Yi Gang also said China needs positive real deposit rates, according to Bloomberg.

His remark has been interpreted as a sign that the monetary authority may be planning to raise interest rates this year to keep pace with inflation.

Some international investment banks have predicted that the central bank would raise the interest rate one more time at most this year.

It raised the rate on both deposits and lending on Tuesday - the fourth increase this year - pushing up the one-year savings rate to 3.6 percent and the benchmark lending rate to 7.02 percent.

Although the hikes were aimed at cooling off the country's blistering economic growth and slowing down fixed-assets investment and lending, they will also help ease the negative deposit rates, said Hu Shaowei, a senior economist with the State Information Center.

Depositors have been suffering from negative real interest rates since inflation hit 5.6 percent in July, a 10-year record.

"We must prevent real deposit rates from sliding into negative territory over an extended period," Yi Gang said. "That would distort and harm the economy."

China should continue to curb excess financial liquidity, boost domestic consumption, adjust its economic structure and allow capital outflows in an "orderly" way to prevent economic risks, Yi Gang said.

(China Daily August 25, 2007)

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