Higher Yuan Signaled

Another signal from the central bank that it will let the yuan rise faster this year to stimulate domestic demand as part of its fight on inflation, now at an 11-year high.

The Peoples Bank of China’s latest monetary policy report says currency appreciation will play a bigger part in a push to tighten monetary policy, along with higher interest rates and slower money growth. The central bank has already let the currency reach its highest level since the mid-2005 scrapping of its dollar peg in favour of a (highly) managed float. The yuan gained 7% last year versus the dollar, twice its rise in 2006. Analysts are forecasting a 12% gain this year.

Central bankers are struggling to sterilize the inflationary impact of the reserves piling up as a result of the country’s current-account. But now that short term interest rates are higher in China than the U.S., policy makers also worry that the prospect of further currency gains will suck in hot money.

PBOC vice governor Yi Gang told a financial conference in Beijing on Sunday that the fallout from the U.S. subprime mortgage mess and the severe winter that has hit central and southern China posed threats to growth (though with the economy growing at 10% plus such worries are relative) , “but taking into consideration all of these changes, we still think inflation is our biggest threat and we should spare no effort to tame prices.”

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