Yuan Falls as Researcher Says Gains Will Hurt China's Economy

Yuan Falls as Researcher Says Gains Will Hurt China's Economy

http://www.bloomberg.com/apps/news?pid=20601089&sid=a67zoJVyspNI&refer=china

By Christina Soon

Aug. 13 (Bloomberg) -- The yuan fell after a government researcher told a newspaper that a stronger currency won't resolve the U.S. trade deficit and a ``big appreciation'' will hurt China's economy and slow job growth.

Revaluing the currency again will hurt growth and jobs, China Business News reported, citing Xia Bin, director of financial research at the State Council Development Research Center in Beijing. The central bank has raised interest rates three times this year to cool an economic expansion that was the fastest in 12 years last quarter.

``Despite all the political pressure, China is still using domestic tools rather than the Chinese yuan to manage the economy,'' said Irene Cheung, an economist at ABN Amro Bank NV in Singapore. ``I don't think that will change in the near term. If there's any need to adjust domestic policy, it will use interest rates.''

The yuan fell for a second day, by 0.11 percent to 7.5827 against the dollar as of 11 a.m. in Shanghai. The currency declined as low as 7.5833, the weakest since July 10.

The People's Bank of China in its second-quarter monetary policy statement on Aug. 8 said it will increase the yuan's flexibility and keep stability of the exchange rate at a ``reasonable level.''

The U.S. Senate Finance Committee on July 26 approved legislation that would put higher duties on Chinese imports to compensate for what lawmakers say is an undervalued yuan. Trade frictions may increase, the central bank said in the policy statement.

China's Reserves

The yuan has declined 0.2 percent since Finance Minister Jin Renqing on Aug. 3 said China isn't making exchange-rate reforms ``because of demands of others.''

China's dollar assets, including American government bonds, are an ``important component'' of the country's foreign-exchange reserves investment, the central bank said in an article published by the official Xinhua News Agency on Aug. 12.

The central bank's comments came after Xia said on Aug. 9 in an interview that China should consider using its $1.33 trillion currency reserves as a ``bargaining chip.'' The U.K. Daily Telegraph reported the previous day that China may threaten to sell its Treasury holdings in the event of U.S.-imposed trade sanctions.

The yuan stayed lower after China's inflation accelerated to the highest in more than 10 years. Consumer prices jumped 5.6 percent in July from a year earlier, the National Bureau of Statistics said today. That beat the 4.6 percent median estimate of 17 economists surveyed by Bloomberg News.

A report by the Ministry of Commerce today showed foreign direct investment increased 12.9 percent in the first seven months of 2007 to $36.9 billion. Spending by overseas companies rose from a year earlier to $36.9 billion.

Bonds Drop

Government bonds fell on speculation the central bank will raise interest rates for a fourth time in 2007 to curb inflation.

The yield on the benchmark 10-year bond rose 3 basis Points, or 0.03 percentage point, to 4.34 percent, according to the China Interbank bond market. The price of the 4.4 percent securities due in June 2017 fell 0.25, or 2.5 yuan per 1,000 yuan face amount, to 100.50.

``This may prompt the central bank to increase rates again in September, so bonds are under pressure,'' said Qu Qing, a fixed-income analyst at Shenyin Wanguo Research and Consulting Co. in Shanghai.

The central bank raised the benchmark one-year lending rate to an eight-year high of 6.84 percent on July 21 and the deposit rate to 3.33 percent from 3.06 to cool growth and inflation.