China will use yuan exchange rate to help curb inflation

This is the first time Wen has publicly acknowledged that the exchange rate of the yuan is key to combating inflation.

China has in the past used interest rates and bank deposit reserve ratios to keep a lid on prices.

“We must make good use of various pricing and quantitative tools, including open-market operations, bank deposit reserve ratio, interest rates and exchange rates, to manage monetary factors in inflation,” Xinhua quoted Wen as saying during a recent visit to the eastern province of Zhejiang over the weekend.

Many economists have been arguing that China should give the yuan exchange rate a bigger role in taming inflation.

Zhou Xiaochuan, the People's Bank of China governor, said last month that the yuan plays only a secondary role among China's options to temper inflation.

It is not clear if Wen was hinting that China would allow a faster yuan appreciation in the face of rising international commodity prices.

In response to a direct question on whether China will allow the yuan to rise faster to control inflation, Wen said last month that China would make the yuan exchange rate more flexible but the process of appreciation would be gradual.

China reported a trade deficit of US$1.02 billion in the first quarter of this year — its first quarterly deficit since 2004 — partly due to rising prices of raw materials and resources.

China has faced calls from the United States, the European Union and others to let the yuan appreciate more quickly as a way to cut its yawning trade surplus.

Beijing has opted for gradual nominal appreciation: The yuan has gained just 4.5 percent against the U.S. dollar since being depegged last June.

A poll by Reuters of 22 economists found that China's consumer inflation may have accelerated to a 32-month high of 5.2 percent last month. Beijing has set an inflation target of 4 percent for this year.

China's central bank has increased benchmark interest rates four times since last October and has required the country's big banks to put a record high of 20 percent of their deposits with the central bank as reserves.

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