Yuan 'straitjacket' risks China asset bubble

While the central bank's 5.31 percent benchmark one-year lending rate is lower than the near-zero policy rate maintained by the U.S. Federal Reserve and Bank of Japan, China's faster economic and credit growth rates mean it needs to boost borrowing costs, according to a survey of economists by Bloomberg News.

The central bank will take that step in the second quarter of 2010, the median estimate of 29 economists surveyed Oct. 22- 28 shows. Any move to raise rates would cause additional inflows of international capital that stoke asset prices, analysts say.

“An interest-rate hike would invite capital inflows,” says China International Capital's Ha, who previously worked at the International Monetary Fund and Hong Kong Monetary Authority. “The root of asset-price inflation in China is the lack of an independent monetary policy.”

T.J. Bond, chief Asia-Pacific economist at Bank of America- Merrill Lynch in Hong Kong, says “the peg is a straitjacket on the PBOC, limiting its ability to tighten policy and head off asset bubbles.”

China's benchmark Shanghai Composite Index of stocks has climbed 74 percent in 2009. The US$1.3 trillion in new loans this year ignited private housing investment, which rose 35 percent in August from a year before, accelerating from a 20 percent gain in July, according to New York-based JPMorgan Chase & Co.

China Vanke Co., the nation's largest developer by market value, increased average apartment prices in September, charging 10,168 yuan (US$1,489) per square meter, 26 percent more than a year earlier. Property sales climbed 27 percent in September from a year earlier, according to the company.

Policy makers have said they want to keep the yuan stable to help exporters, even as government figures last month showed gross domestic product rose 8.9 percent in the third quarter and exports dropped by the least since December.

Commerce Minister Chen Deming said Nov. 1 in Guangzhou that the yuan should be kept relatively stable to aid manufacturers and exporters, state news agency Xinhua reported. PBOC Governor Zhou, ahead of a G-20 meeting in Scotland this month, said international pressure for appreciation was “not that big.” The same day, Japan's Vice Finance Minister Yoshihiko Noda said Noda it is “desirable for the yuan to be flexible.”

Premier Wen Jiabao didn't mention currency policy in a Nov. 12 speech; in July, he said he favored keeping the yuan stable at a reasonable and balanced level.

“The exchange-rate issue is decidedly off the agenda,” says Goldman's Hu, 46, a former International Monetary Fund economist who speaks with officials on his weekly trips to Beijing. He says policy makers will wait to judge the durability of the global economic and financial recovery before making any change to their stance on the yuan, also known as the renminbi.

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