More moves urged to stabilise yuan

Carrie Lee

MORE measures are needed to bolster the value of the yuan, which is still volatile, a banker says.

The call follows reports that China's urban inflation rate in July was higher than in June, which suggested that the austerity plan was not working.

Citibank country corporate officer Antony Leung said: ''On the surface, the measures taken so far appear to have been quite effective in stemming the slide of the yuan. Underneath, however, the potential for volatility remains.

''The current stability cannot last long, and further steps need to be taken to address the fundamental problems that caused the weakness of the renminbi.'' The cause of the currency's depreciation was rising inflation and the lack of monetary policy tools to control money supply and credit.

''The outlook for the renminbi exchange rate is therefore closely tied to the success of China's fiscal and monetary reform,'' said Mr Leung.

To reduce the fiscal deficit, he called for privatisation of state-owned enterprises and broadening of the tax base.

Mr Leung also called for legislation to prohibit the Government from borrowing from the central bank.

Any fiscal shortfall should be covered by issuing more state bonds, he said.

He also suggested that the central bank - the People's Bank of China - and its branches should be independent from central and local government.

He proposed a model in which the premier would appoint the central bank's governing board which would set and manage its money supply growth targets.

''China should promulgate a central bank law as soon as possible. The law should specify that maintaining price stability be one of the primary goals of the PBOC,'' he said.

Mr Leung also urged that the banking system be commercialised, with deregulated interest rates.