China: Yuan not key to curbing inflation

Zhou Xiaochuan, governor of the People’s Bank of China, also said that steep U.S. rate cuts would not stop Beijing from moving in the opposite direction and raising rates to cap consumer price inflation, which hit an 11-year high of 7.1 percent in January.

Since China announced it was shifting to a tight monetary policy in December, the yuan has appreciated at an annualized rate of more than 15 percent, feeding market views that the country would lean on a stronger currency to cool its sizzling economy.

“The exchange rate should not be a key measure in fighting inflation,” Zhou told a news conference during China’s largely rubber-stamp annual parliament.

“For China, with a 1.3 billion population, controlling inflation should rely mainly on domestic policies, namely monetary tightening,” he said.

Zhao also said the direct impact of the U.S. subprime crisis on the Chinese economy has so far been limited, but policy makers should pay attention to possible ripple effects.

“As of now, the crisis has not yet run its course, and it shouldn’t be ignored,” Zhou said on the sidelines of the ongoing annual meeting of the nation’s parliament.

“In terms of the direct impact... the proportion of subprime investments accounted for by Chinese financial institutions is relatively small, and they can handle it,” he said.

“In terms of the indirect impact, the U.S. economy may influence the global economy, for instance when it comes to trade, and there may be some further effects, so we need to wait and see.”

A third possible impact was in the form of the U.S. Federal Reserve’s interest rate cuts, which might loosen liquidity, with an impact on China’s monetary policies, he said.

A number of Chinese lenders, including Bank of China, have reported limited exposure to subprime assets.

Beijing has resorted to a mix of tools — raising commercial banks’ reserve requirements, mopping up liquidity through open-market operations, raising interest rates and imposing credit quotas — to tighten monetary conditions.

But some economists have said that after six increases last year, China’s freedom to raise interest rates further had been limited by successive cuts in the United States as the Federal Reserve tries to counter a credit crunch and housing recession.

A sharp narrowing in the rate gap between the two countries has raised the specter of hot money inflows into China, a major worry of officials in Beijing.

Asked if rates could be raised again, Zhou said:

“I am sure there still is room. Of course, U.S. rate cuts have an impact on China’s interest rate decisions, but they are not the only consideration. There are also domestic factors.”

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