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China's Central Bank To Slow 'Unacceptable' Yuan Growth, Says Central Bank Official

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BEIJING (Reuters) - China will not tolerate any sharp yuan rises to shield local exporters, limiting annual appreciation to 3 percent in the next five years, a senior central bank official was quoted by local media as saying.

China's central bank has to keep buying foreign exchange to limit yuan gains, a report on the website of Caijing magazine quoted Li Bo, head of the second monetary policy department at the People's Bank of China, as saying.
"If the central bank stops buying foreign exchange, the yuan will appreciate sharply, which is unacceptable," Li was quoted by the report on the website: www.caijing.com.cn.

"Sharp yuan appreciation will seriously affect the export sector, jobs and economic growth," Li added.
To keep the yuan stable, the central bank has to buy foreign currency entering the country in the form of trade surplus, foreign direct investment and hot money inflows, pumping out huge amounts of local currency as a result.
The yuan could rise gradually to between 5 and 6 against the dollar in the next five years, approaching its "equilibrium" rate, Li said.

"Expectations on the yuan to rise has weakened somewhat, and we are able to withstand an annual yuan rise of about 3 percent," Li said.

The yuan has gained about 3.9 percent since it was depegged from the dollar in June 2010.

China has shrugged off foreign criticism that the yuan is still undervalued, which gives Chinese exporters an unfair advantage in international trade.

Top Chinese officials, including Premier Wen Jiabao and central bank governor Zhou Xiaochuan, repeatedly said that China would keep the yuan basically stable while reforming the currency regime to make it more responsive to market forces.

But many analysts believe China will allow the yuan to rise 5-6 percent this year to help curb imported inflation.
Li said China should gear up to make the yuan fully convertible in the next five years.

"We have to make a big step forward in opening the capital account in the coming two or three years so that we can basically realize the goal of full yuan convertibility in the 12th five-year plan," Li said.

(Reporting by Zhou Xin and Kevin Yao; Editing by Jacqueline Wong)

Copyright 2011 Thomson Reuters. Click for Restrictions.

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