Strong yuan sets off alarm on payments gap
Beijing's foreign exchange watchdog warns that the country faces a larger external account this year as the yuan appreciates faster than expected.
Efforts to restore China's international balance of payments were increasingly difficult as the United States credit market crisis spread and inflation continued to bite, the State Administration of Foreign Exchange (SAFE) said on its website.
SAFE deputy director Wang Xiaoyi said key measures such as deeper reform of foreign exchange management, improving the yuan rate-setting mechanism and enhancing levels of analysing and forecasting the global economic climate would be implemented.
'Against a backdrop of faster than expected yuan appreciation and a gap between interest rates of the domestic and overseas markets, China faces widening international balance of payments and growing inflation,' Mr Wang said.
'The country's macroeconomic outlook has become more complicated.'
Mr Wang joined the chorus of Beijing policymakers worried that a widening interest rate gap would draw speculative capital or hot money into the country, further bloating the state's excess liquidity and adding hurdles to monetary tightening.
Despite Beijing raising interest rates six times last year, inflation hovered near an 11-year peak and foreign capital inflows increased.
'I agree that the huge external account is a key challenge to China this year,' said Huang Yiping, Citibank Global Markets managing director and head of Asian economic and market analysis. 'More flexibility in the yuan exchange is welcome.'
Mr Huang expected the yuan to gain 7.5 per cent against the US dollar by the end of this year, following the local currency's rise of about 17 per cent since its revaluation in 2005 or 3 per cent since January.
The yuan's exchange rate jumped to a record of 7.08 against the dollar yesterday. But the magnitude and pace of the yuan's appreciation is unreasonably slow from the perspective of China's top two trading partners, the US and European Union, which say a lower yuan gives Chinese exports competitive advantages.
The Sino-US interest rate gap is expected to widen as economists bet as much as a 1 per cent rise in US rates today. People's Bank of China governor Zhou Xiaochuan has said Beijing had room to raise interest rates.
