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Expert: China should limit pace of yuan rise

(Reuters)
Updated: 2007-06-11 14:50

China should contain the pace of yuan appreciation within a bearable range because a big rise would aggravate the country's overcapacity problem, a prominent economist said in comments published on Monday.

The yuan has now gained a further 5.7 percent since it was revalued by 2.1 percent and freed from a dollar peg to float within managed bands in July 2005.

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Last month, authorities widened the yuan's daily trading band against the dollar to up or down 0.5 percent from its morning mid-point, compared with 0.3 percent before.

But a big rise in the currency would reduce the country's exports and subsequently worsen overcapacity in exporting sectors, Justin Lin, a professor with Peking University, wrote in People's Daily.

Moreover, an increase in imports resulting from a stronger yuan would displace some domestic products, exacerbating the problem of excess production in those sectors, Lin said.

That would push some domestic manufacturers into bankruptcy and risk fanning economic and financial crisis, he added.

"In developing countries with rapid growth, the government should send clear-cut signals to the market to create stable expectations about currency appreciation and keep the scale of strengthening within a bearable range," Lin said.

Lin did not spell out how much of an annual rise would be appropriate, but he has said in the past that a pace of 3 to 5 percent a year was suitable.

His comments came even as the yuan fell sharply against the dollar on Monday, extending last week's slide and erasing gains from a rally that preceded Sino-U.S. trade talks in May, as the central bank applies the brakes to the currency's ascent.

Lin also said the government should step up its macroeconomic controls by employing a mix of tools, including industrial and fiscal measures, to steer the economy into safe waters.

Monetary policy alone is not enough because the central bank is now facing a dilemma in moving in interest rates, Lin said.

Increasing lending and deposit rates by the same margin would dampen consumption, while raising the lending rate by more than the deposit rate would give banks greater incentive to lend, he wrote.

China has raised benchmark interest rates four times since April 2006 and increased the proportion of deposits banks have to hold in reserve on eight occasions in the past year.