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China to use exchange rate to adjust economy: central bank
SHANGHAI, Aug 9 (AFP) Aug 09, 2006
China's central bank said Wednesday it plans to use the exchange rate to adjust the country's economy but warned against the view that yuan appreciation was the sole solution to global imbalances.

In its second quarter report the People's Bank of China said the Chinese economy was running at a fast but steady rate with investment, consumption and exports all expanding vigorously.

It acknowledged persistent economic imbalances and said a "basket of policies" were needed to address the problem of China's massive trading surplus.

But once again the central bank argued against focusing solely on an exchange rate adjustment as a means of curbing the surplus.

"The most fundamental way to solve large surpluses in international payments is to expand consumption and cut the savings rate," it said.

"The exchange rate is just one part of a basket of policies and can play a certain role in adjusting imbalances in international payments."

China has struggled to curb capital inflows while trying to limit the yuan's appreciation. Trading partners accuse China of keeping its currency undervalued to boost exports.

Fund flows have led to money supply growth running at least two percentage points higher than the government's official full-year target of 16 percent for 2006, with bank lending surging in the first half of the year.

The central bank said loan growth was too high and tough to curb.

"With a capital and current account surplus, it's difficult to control the growth of fast credit," it said.

The central bank was also concerned about high fixed-asset investment growth, warning it posed a risk to the economy.

Fixed asset investment growth, a wide measure of spending on major infrastructure, topped 30 percent year-on-year in the first six months of 2006.

The central bank also sounded a warning about consumer prices, saying inflationary pressures would rise posing further risks to the economy.

China's gross domestic product (GDP) expanded by 10.9 percent in the first half of the year, with the bank forecasting only a minor slowdown in the second half.

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