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Analysis: Market expects China to fight inflation via RMB appreciation

Friday, April 22, 2011 4:58 AM

BEIJING, Apr. 22, 2011 (Xinhua News Agency) -- In the face of rising pressure of inflation, China may resort to the appreciation of its currency to tackle the problem.

China's senior government officials have said on many occasions that the RMB exchange rate could become one of the instruments to ease inflation pressure.

Zhou Xiaochuan, governor of the People's Bank of China (OOTC:BACHY) (PBOC), China's central bank, said at the Boao Forum for Asia (BFA) that China had already used foreign exchange rate as a tool to fight inflation.

Hu Xiaolian, deputy governor of the PBOC, said in an article posted on the bank's website that China would further improve the RMB exchange rate formation mechanism and enhance the flexibility of the RMB exchange rate to ease imported inflationary pressure.

-- RMB appreciation helps ease imported inflation

China is over 50-percent reliant on imported staple commodities such as crude oil and iron ore. Along with price hikes of these commodities, China is facing mounting pressure of imported inflation.

In the first quarter of this year, China's Producer Price Index (PPI) and industrial producers' purchase price index rose 7.1 percent and 10.2 percent respectively. The pressure for the raw materials price hikes transferred to down-stream sectors is mounting.

Besides the food price increases in the Consumer Price Index (CPI), non-food prices within the CPI basket also increased in Q1.

Lian Ping with the Bank of Communications (BOCOM) said that the exchange rate should be used as a tool to curb the imported inflation, as the oil price hike on the international market had pushed up the cost of China's manufacturing and transporting industries.

According to a research by ANZ Bank, if the RMB exchange rate against US dollar appreciated by 10 percent, the PPI would drop 3.2 percent in the mid term, and the non-food prices in the CPI basket would fall 0.64 percent.

The ANZ Bank said that China may resort to foreign exchange rate policy to curb imported inflation, including speeding up the pace of RMB appreciation and broaden the daily fluctuation band for RMB trading.

Actually, the RMB exchange rate has accelerated the pace of appreciation against the US dollar since the beginning of this year. It has appreciated 1.5 percent since the turn of the year.

The following figure shows the central parity rate of yuan against the dollar since 2010:

According to a forecast by BOCOM, the RMB will appreciate by 5 to 7 percent against the dollar this year.

-- RMB appreciation helps reduce money supply

Analysts also pointed out that the appreciation of the RMB would help reduce China's money supply.

According to ANZ Bank, appreciation of the RMB would reduce both the country's trade surplus and the PBOC's balance sheet, so reducing the money supply.

Hu Xiaolian said that the current excessive liquidity resulted from the forex inflows. In order to address the problem, China should aim for its international balance of payments to be broadly neutral.

Lian also said that China's current economic conditions could support the appreciation of the RMB.

China has already begun to encourage overseas investments and promote the internationalization of the RMB to ease the pressure of foreign capital inflows. (Edited by Jiang Yujuan, jiangyj@xinhua.org)

(Source: )
(Source: Quotemedia)


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