UPDATE 1-China c.bank mentions "basket" for managing yuan

Mon May 10, 2010 7:22am EDT

* "Basket" wording reappears in China central bank report

* Warning that Europe debt problems pose systemic risk

* Says that price pressures on rise in China (adds quotes, details)

BEIJING, May 10 (Reuters) - China's central bank said on Monday that it will manage the yuan "with reference to a basket of currencies", phrasing which could signal that it is preparing to end the yuan's de facto dollar peg.

Although the wording is not new -- it has been used since 2005 -- it had disappeared from the previous quarterly monetary policy report by the People's Bank of China, but reappeared in the latest version.

It is "an important language change", Morgan Stanley economist Qing Wang said in a note to clients.

"(This), in my view, signals for the first time Chinese authorities' intention to make a move," he said, adding that he expected Beijing to resume appreciation this summer.

China has held the yuan steady at about 6.83 to the dollar since mid-2008, in an attempt to cushion the economy from the global financial crisis.

With inflation on the rise and international pressure mounting, speculation had swirled in recent weeks that it was only a matter of weeks before Beijing let the exchange rate resume appreciation.

Many analysts think that international jitters in the wake of Greece's debt crisis could stay its hand, though some say that an environment of risk aversion may give China a window of opportunity to reform the yuan without attracting much-feared hot money inflows. For story, see: [ID:nTOE64905O]

The central bank addressed the Greek woes in its quarterly report, saying that European sovereign debt problems could pose a systemic challenge to the global economy.

Separately, Premier Wen Jiabao on Monday said that China supported efforts by the International Monetary Fund and euro-zone countries to help Greece overcome its troubles. [ID:nBJA002252]

The central bank warned of dangerous consequences should these efforts fail: "If certain developed countries are not able to effectively cut down expenditures and increase revenues, the possibility that the sovereign debt crisis might spread globally cannot be ruled out."

ROAD TO RECOVERY

It singled out Europe and Japan as laggards in the global recovery, but said that emerging markets and the United States were well on the road back to health.

Data released on Monday supported the central bank's guarded optimism, with 30.5 percent year-on-year growth in exports powering China to a small, unexpected trade surplus of $1.7 billion in April. [ID:nTOE649026]

Turning to the domestic economy, the central bank said that demand was robust but warned of increasing price pressures on the back of excessive liquidity and rising global commodity prices.

It said it would work to prevent housing prices from rising too quickly, thereby fuelling inflation.

The central bank also vowed to maintain its "appropriately loose" monetary policy, implemented since the onset of the global financial crisis in late 2008.

In practice, China has been gradually normalising its monetary stance after it pumped an extraordinary flood of cash into the economy last year to lift it over the global slump.

The central bank has increased banks' reserve requirements three times this year and has also stepped up cash withdrawals via open market operations. (Reporting by Lee Chyen Yee, Aileen Wang, Langi Chiang and Simon Rabinovitch; editing by Tony Austin)

FILED UNDER:
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.