BEIJING: China must rein in its foreign exchange reserves to help curb inflation, through moves such as making the yuan more flexible and gradually opening its capital account, a senior foreign exchange official said in published remarks.
But Mr Guan Tao, head of the international payment department at the State Administration of Foreign Exchange, warned against sharp currency rises.
'If we cannot slow the rise in foreign exchange reserves, our work to control consumer prices and property prices will be greatly undermined,' he wrote in the latest edition of China Finance.
'Even if the property prices can be curbed, we cannot stop liquidity from shifting to other markets, brewing other forms of asset bubbles,' he added.
China's foreign exchange reserves swelled by nearly US$200 billion (S$247 billion) in the first quarter to more than US$3 trillion, indicating hefty capital inflows given that China had a US$1.02 billion trade deficit during the first three months.
The persistent increase in foreign exchange reserves has been fuelling inflationary pressures in China, Mr Guan said.
The rapid reserve build-up means the People's Bank of China keeps pumping out large amounts of yuan liquidity into the economy - the root course of domestic inflation - as the central bank has to buy most incoming dollars to slow the yuan's gains.
Mr Guan said Beijing's bid to boost the yuan's international status by expanding the currency's use in trade may lead to more money inflows initially.
China is pressing ahead with attempts to reduce its reliance on dollars in international trade. But the yuan is used more often to pay for China's imports than its exports, so the central bank ends up accumulating even more foreign reserves - mostly US dollars - because few trade partners now have enough yuan on hand to pay for Chinese goods.
This factor added roughly US$40 billion to foreign exchange purchases in the first quarter, according to estimates by Mr Mark Williams, China economist at Capital Economics.
Since October, China's central bank has raised benchmark interest rates four times and tightened lenders' reserve requirements seven times as it seeks to rein in loan growth and keep a lid on inflation.
Greater yuan flexibility will help rebalance the economy and curb bets on one-way yuan appreciation, Mr Guan said. But he saw no basis for sharp yuan appreciation, given that China's current account surplus has been narrowing.
The yuan has gained 25 per cent against the US dollar since the 2.1 per cent landmark revaluation in July 2005. Chinese officials have repeatedly ruled out another one-off revaluation despite foreign pressures.
REUTERS
