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Xinhua: Think Tank Suggests Yuan Flexibility
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BEIJING (XFN-ASIA) - The Chinese government should allow more yuan flexibility, a leading state-owned research institute said, arguing that monetary policy measures taken so far are tackling the symptoms, rather than the cause, of the problems.

The State Information Center noted that the People's Bank of China, the central bank, has taken steps to address liquidity issues but it added that funds continue to pour into the country, and the matter is aggravated by a rigid exchange rate.

"We believe this excessive liquidity is the result of an economic imbalance and that an important way to correct this imbalance is to increase exchange rate flexibility," it said in a report in the Shanghai Securities News.
"Increasing exchange rate flexibility is an effective way to handle this excess liquidity situation."
It said that yuan flexibility needs to increase against the US dollar, but also against the other currencies in the basket which the central bank said in July 2005 would act as a reference point for setting the Chinese currency's value.

The State Information Center also said that the daily trading band which governs the yuan's daily moves needs to be widened from the current 0.3 pct.

The think tank did not make specific recommendations.

The State Information Center is a research institute affiliated with the National Development and Reform Commission, the powerful planning agency. Their economists were among the teams charged with calculating the size of China's one-off yuan revaluation in July 2005.

The yuan has gained 6.55 pct against the greenback since currency reforms were announced on July 21, 2005, including that day's one-off 2.1 pct revaluation.

The currency rose 3.29 pct against the US dollar last year, and is expected to rise by 4-6 pct in 2007.
The report also said that the central bank will continue to use central bank paper issuance, reserve requirement increases "and even interest rate hikes" to control excess liquidity this year.

It noted that, among the indicators it watches, electricity output, industrial output and corporate profitability are in the "red" zone -- meaning government action is likely required -- while M1, fiscal revenue growth and trade are at "amber" and that CPI, investment and retail sales growth are at "green."

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