Currency appreciation will not tame inflation, says BoC officer

SHANGHAI - The revaluation of the yuan will not be an effective weapon against inflation but rather a consequence of growing inflationary pressure, a senior officer from Bank of China said.

Deng Lei, deputy general manager of the treasury department of the Shanghai branch, Bank of China, was speaking amid widespread calls to allow the currency's appreciation to control rising wage costs.

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"I do not see much of a correlation between the two, as the rocketing prices of international commodities have contributed to the current inflation rate," he said.

"For instance, if the yuan appreciates by 5 percent and the price of crude oil surges by 10 percent, the domestic market still faces a 5 percent rise, which leaves the problem unsolved," Deng told China Daily last week.

With speculation that China's consumer price index (CPI), the major gauge of inflation, will show a record high in March since last November, billionaire investor George Soros said earlier this month that the appreciation of the currency as a way of controlling inflation would be "advantageous".

World Bank economist Justin Yifu Lin also broached the issue in a recent interview with the Wall Street Journal, saying that the "high inflation rate will definitely affect the decision of the Chinese government".

But previous experience in some South American countries has indicated that the rise of a currency might thwart its competitiveness in exporting goods, which can lead to the collapse of the national economy, Deng said.

China this month registered its first quarterly trade deficit in seven years, reflecting the faster-than-anticipated rising prices of imported commodities. According to Bloomberg, inbound crude oil shipments rose 12 percent by volume and 39 percent by value, while iron-ore imports rose 14.4 percent by volume and 82.5 percent by value.

The yuan's appreciation "will be no help in rebalancing global recovery, as it would depress US consumer demand and would not shrink the US trade deficit", Deng said.

The yuan has gained 4.6 percent against the US dollar in the past two years, the second-smallest gain of 10 Asian currencies tracked by Bloomberg.

According to Deng, expanding domestic demand also has a role to play in the current situation.

"Domestic demand, notably rising labor costs, has helped to cause the high inflation but it is inevitable during economic transitions," Deng said. "Tightening monetary measures, therefore, will assist in managing the inflationary pressure caused by domestic stimulation plans after the financial crisis."

The People's Bank of China has raised interest rates four times and boosted the banks' reserve requirement ratios six times since the third quarter to help contain inflation. HSBC Holdings Plc and Credit Suisse Group AG have both predicted a further climb of the benchmark deposit rate last week.

While Deng also forecast the possibility of another rate increase in a "steady and gradual manner", he emphasized the moves "cannot continue indefinitely as it brings new pressure on exchange rate hikes that deviate from the idea of curbing liquidity".

Chang Fangtien, head of Global Treasury China at Singapore-based OCBC Bank, said in a recent panel discussion in Shanghai that for the fastest-growing economy, interest rates remain a more useful instrument than exchange rates in the face of mounting inflationary pressure.

But Washington's second round of quantitative easing policies, which failed to insulate China from imported inflation, once discarded, "will be critical to combating inflation worldwide, including China", Deng said.