China to ease upward pressure on renminbi
By James Kynge in Beijing
China signalled on Friday it plans to intensify efforts to relieve upward pressure on its currency from continued strong inflows of speculative funds betting on a renminbi revaluation, as a senior official expressed concern over rising inflation and an incipient asset bubble.
"The inflation rate is rising, and the asset bubble problem is starting to get worrying," said Guo Shuqing, head of the State Administration of Foreign Exchange, a body beneath the central bank that manages the country's foreign reserves.
Economists estimate that roughly $50bn in "hot money" inflows found their way into China last year, pushing domestic money supply to record levels and fuelling inflationary pressures. The hot money largely represents funds brought back to China by local businessmen or overseas Chinese to benefit from a predicted renminbi appreciation.
But Mr Guo made it clear that the People's Bank of China, central bank, has no intention to cave in before the will of speculators. He said Chinese firms would be able to retain more foreign currency and outward investment by Chinese would be encouraged - both measures to ease upward pressure on the renminbi. Inflows remained strong in January, with the foreign currency reserves rising to nearly $416bn, up from $403bn at the end of 2003.
"The ways to reduce the balance of payments surplus include increasing imports, adjusting exports, expanding capital outflows, reducing capital inflows and enhancing the elasticity of the exchange rate," Mr Guo said.
The strategy he outlined is a continuation of the central bank's longstanding plan to rebalance demand between the renminbi and the US dollar in China by increasing demand for the dollar and decreasing demand for the renminbi.
Chinese companies would therefore be allowed in the first quarter of this year to retain more of their hard currency earnings, thereby reducing pressures on the renminbi money supply. Currently, the central bank buys all but a small portion of hard currency earned by exporters and repays them in renminbi.
The government was also studying the Qualified Domestic Institutional Investor (QDII) scheme, under which mainland Chinese would be allowed to invest in overseas stock markets through selected institutions - another step that would require the selling of renminbi and buying of US dollars. QDII would be implemented when the "conditions are mature".
China would also limit illegal inflows of foreign funds into its stock markets and keep scrutinising "suspicious" foreign exchange deals and curb short-term foreign borrowings, Mr Guo added. Authorities would also develop new instruments, such as swaps and "market makers", to help companies hedge currency risk, he said.
China's longer-term plan is to allow the renminbi to fluctuate within a wider band than its current Rmb8.3 peg to the US dollar. Some analysts think greater flexibility will be introduced when upward pressure on the renminbi becomes unbearable.
But one official told the Financial Times that greater flexibility would only be introduced once demand between the US dollar and renminbi had reached rough equilibrium.
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