CHINA / National

Central bank: Economy to slow down slightly
Updated: 2006-08-10 09:51

China will boost imports, loosen controls on outflows of capital and make the yuan more flexible to help curb a record trade surplus and slow the fastest economic growth in a decade, the central bank said.

The People's Bank of China will "adjust the policy bias" that encourages exports, the central bank said in a second-quarter monetary report posted on its Web site Wednesday. It forecast the economy will slow "slightly" in the second half, after expanding 10.9 percent in the first six months.

A Chinese customer shows off a handfull of hundred-yuan notes at a local bank in Beijing, May 2006. [AFP/file]

China's trade surplus swelled 50 percent in the first half of the year to US$61.5 billion, flooding the world's fourth-largest economy with cash and complicating government efforts to cool investment. A stronger yuan may help ease inflows, making it easier for the government to prevent the economy from overheating.

"Today's report indicates the government is going to give a more prominent role to the exchange rate and the current account and capital account surplus in controlling the domestic economic situation of overheating and fast investment growth," said Wang Qing, head of economics and strategy at Bank of America in Hong Kong.

China's trade surplus in July hit a record US$14.61 billion, with export up 22.6 percent to US$80.34 billion from a year ago, and imports up 19.7 percent to US$65.72 billion, the Shanghai Securities News reported, citing an unnamed customs official.

The report said exports for the seven months to July rose 24.8 percent to US$508.9 billion. Imports for the period were up 21.1 percent at US$432.95 billion.

Premier Wen Jiabao last month called the "intensifying imbalance in international payments" one of the country's five most prominent economic problems.

Yuan Rate

The central bank reiterated its pledge on Aug. 2 to use a mix of monetary tools including a more flexible exchange rate to rein in the economy.

The exchange-rate system introduced last year, when China revalued the yuan and ended a decade-old peg to the U.S. dollar, is helping to "balance" the economy, the central bank said in Wednesday's report. The market is playing a bigger role in setting the exchange rate, it said.

But the bank said that China cannot rely solely on currency appreciation to balance its external payments.

"As part of a policy package, the exchange rate can play a certain role in adjusting the imbalance in international payments. But the fundamental way to resolve the international payment imbalance should come from expanding domestic demand and lowering the savings rate."

The yuan fell 0.08 percent to 7.9772 per dollar as of 3:30 p.m. in Shanghai. It has gained 1.7 percent since China revalued the currency on July 21, 2005. The currency last month had its biggest monthly gain since the revaluation, rising 0.36 percent.

U.S. lawmakers say the yuan is kept artificially weak to give Chinese goods an unfair competitive advantage, and are threatening to impose punitive tariffs on imports from China unless the currency is allowed to gain more rapidly.
The central bank is also considering expanding overseas investment as a way to slow the rapid growth in foreign exchange reserves.

China's foreign exchange reserves, driven by the ballooning foreign trade surplus and foreign investment inflow, had shot up to US$941.1 billion by the end of June.

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