China Steps Up Efforts to Cool Economy
SHANGHAI -- China's financial regulators late Friday announced measures aimed at offsetting inflation and other risks associated with its surging economy -- and the one-way flow of money into the country the growth has encouraged.
The State Administration of Foreign Exchange said that starting Feb. 1, its citizens will be permitted to exchange yuan for up to $50,000 per year in foreign currency, a sharp rise from the $20,000 limit now.
In a separate move, the People's Bank of China, the central bank, also said it would tighten credit with its fourth increase in the reserve requirement in less than a year, a technical move meant to soak up money in the financial system and crimp bank lending.
The reserve requirement is the percentage of deposits commercial banks must deposit with the PBOC rather than lend. The PBOC said it would raise its reserve requirement ratio for the fourth time since last April and sixth time since 2003. The latest 0.5 percentage-point increase, effective on Jan. 15, will put the ratio at 9.5%.
The move could temporarily slow China's surging stock market, which more than doubled in value last year, but will likely have little impact on the real economy, according to a report Friday from Deutsche Bank AG by economist Jun Ma. The reserve requirement could rise at least once more in the first half of this year but "has become a regular liquidity management tool" rather than a strong-armed tactic, Mr. Ma said.
China's economy is unbalanced, with too much money flowing into the financial system from overseas and not enough going out -- a primary reason economists say the country's currency is undervalued. As U.S. dollars and other foreign currency are invested into China to take advantage of the country's 10%-plus economic growth, the foreign currency is converted into yuan and that situation has left the domestic financial system flush with cash. Too much cash is a risk, since in addition to putting upward pressure on the yuan, it could spark inflation or make it easier for poorly conceived investment projects to get funding.
China's consumer price index was up 1.9% in November from the year before and the National Bureau of Statistics estimates it was 1.3% to 1.4% in all of 2006. But housing and other important costs continue to rise and aren't fully reflected in the CPI gauge. The bureau estimates the gross domestic product expanded by 10.5% in 2006.
Last month, President Hu Jintao and China's top policy makers said that dealing with the imbalance was among the government's key priorities for 2007. Washington and many private economists argue Beijing should also address the situation by allowing the value of its currency, the yuan, to rise more significantly. The yuan has gained about 6% on the U.S. dollar since July 2005 but economists believe it could rise even more if market forces could play the major role in establishing the rate.
Even as Beijing slowly loosens its grip on the yuan's exchange rate, it is relaxing some of the rules and restrictions that govern the overall currency system and which have long made it difficult for money to flow out of the country. The higher threshold of foreign currency investment announced on Friday, for instance, is meant to encourage Chinese citizens to invest and spend more overseas, such as on travels and for education. On a grander scale to allow money to flow out, Beijing is also encouraging Chinese companies to make investments elsewhere, including in the exploration of natural resources like crude oil.
From: Wall Street Journal, By JAMES T. AREDDY
Date: January 5, 2007 Back