Yuan appreciation expected to curb inflation and asset bubbles

16:38, June 21, 2010      

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Increased flexibility in the yuan exchange rate will help shift resources from the export sector to service and other sectors relating to domestic demand, transform the economic development mode and reduce the Chinese economy's excessive reliance on exports, said Ba Shusong, deputy director of the Financial Research Institute under the Development Research Center of the State Council.

Yuan rate reform is also expected to help to curb inflation, restrain asset bubbles and increase the initiative and effectiveness of macroeconomic regulations.

Ha Jiming, chief economist and general manager of China International Capital Corporation, said that in the wake of foreign capital inflows in the past, the central bank had to passively purchase a huge amount of foreign capital in order to stabilize the yuan exchange rate. If the reverse were to happen, the central bank must supply a great amount of capital to the market. The overly-rapid increase in money supply will lead to inflation and asset bubbles.

"With the increased flexibility in the yuan exchange rate, the scale of foreign capital purchased by the central bank will shrink considerably and the independence and flexibility of the monetary policies will improve remarkably," Ha added.

As a beneficiary of economic globalization, China needs to further promote the exchange rate reform in order to establish long-term cooperation with other countries for mutual benefit and common development.

"Frankly, if a trade war really broke out, neither side would benefit. Moreover, the impact of the war on some of China's export companies would be more serious than that of short-term exchange rate fluctuations," Ba said.

By People's Daily Online


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