Market News

UPDATE 1-China won't be pressured over yuan peg - Wen

* Under foreign pressure to let yuan appreciate

* Premier says stable yuan has aided global recovery

* Says government concerned by property price rises

* Says money supply growth could fuel inflation expectations

By Zhou Xin and Simon Rabinovitch

BEIJING, Dec 27 (Reuters) - Chinese Premier Wen Jiabao on Sunday struck a defiant note about the country’s controversial exchange rate policy, saying the government would not give into foreign demands to let the yuan rise.

Wen said the currency was facing growing pressure to appreciate, but insisted that China was committed to keeping it stable, having virtually pegged it to the dollar since the global financial crisis worsened in the middle of last year.

“We will not yield to any pressure of any form forcing us to appreciate. As I have told my foreign friends, on one hand, you are asking for the yuan to appreciate, and on the other hand, you are taking all kinds of protectionist measures,” he said.

“The true purpose (of these calls) is to contain China’s development,” he added in an interview with the official Xinhua news agency.

The yuan has fallen against the currencies of most of its trading partners this year because it has been fixed to a weakening dollar, while China’s economy has bounced back strongly. U.S. senators have asked for an investigation into whether current yuan policy represents a form of subsidy that would justify tariffs on Chinese imports.

Wen also repeated an oft-made declaration that the stable yuan CNY=CFXS had contributed to the global economic recovery.

A series of foreign policymakers, including U.S. President Barack Obama, European Commission President Jose Manuel Barroso and International Monetary Fund chief Dominique Strauss-Kahn, have visited China in recent months to press for an appreciation of the yuan.

But many analysts believe that Chinese leaders will want to see several consecutive months of increasing exports before letting the yuan resume the path of gradual appreciation it followed from 2005 to mid-2008.

The market expects a roughly 2.7 percent appreciation of the yuan over the next 12 months, according to offshore forwards pricing.


Wen gave a cautious outlook for the domestic economy in 2010, saying it was too early to wind down the government’s stimulus policies but that officials needed to be attentive to surging property prices and incipient inflation.

Although China would continue to encourage citizens to buy homes for their own use, differentiated interest rates would be used as a tool to fight property market speculation, Wen said.

He was apparently referring to a policy proposal that China could keep preferential mortgages -- a discount of up to 30 percent on benchmark lending rates -- for people buying their first homes but eliminate them for additional home purchases.

More broadly, Wen warned on imbalances rising from too much bank lending while defending China’s use of a 4 trillion yuan stimulus package to fend off the global economic crisis.

“Parts of the economy are not balanced, not coordinated, and not sustainable,” Wen said, repeating previous statements.

It would be better if lending by Chinese banks was not on such a large scale, Wen added.

China’s overall lending situation had improved in the second half of the year, when banks dramatically slowed their pace of credit issuance after a record surge in the first half, Wen said.

Chinese bank are on course to lend an unprecedented 9.5 trillion yuan ($1.4 trillion) this year, double last year’s total. The market expects new loans to fall to about 7.5 trillion yuan next year.

This time last year, central planners facing a sharp downturn in external demand for Chinese exports worried the country would be unable to reach the 8 percent growth deemed necessary to maintain employment and avert social instability.

With the country on track for about 9 percent growth this year and an even faster expansion next year, concerns have instead shifted to whether pockets of the economy are overheating and whether inflation could flare up.

Wen warned that although there is no sign of inflation at present, this year’s exceptional money supply growth could stoke inflationary expectations and that inflation could appear. But he said the government was committed to seeing through its massive two-year stimulus package, launched in late 2008.

“If we have a too-early exit of the stimulus policies, we may lose all that we have already achieved,” he said.