China to Slow Yuan Gains for Growth, Researcher Says

By Belinda Cao and Judy Chen

July 29 (Bloomberg) -- China will slow the pace of the yuan's gains as the government seeks to bolster economic growth, said Li Daokui, a researcher at Tsinghua University who attended a meeting hosted by President Hu Jintao last week.

July 29 (Bloomberg) -- China will slow the pace of the yuan's gains as the government seeks to bolster economic growth, said Li Daokui, a researcher at Tsinghua University who attended a meeting hosted by President Hu Jintao last week.

``Fast yuan gains attracted inflows of speculative funds, which not only fuel inflation but also may exit on a large scale some day, threatening economic stability,'' said Beijing-based Li, head of the China and World Economic Research Center at the university. ``That goes against the central government's goal of stable growth set in the recent Politburo meeting.''

The Politburo's concern that a global slowdown will undermine China's boom prompted the biggest policy change in five years, according to Donald Straszheim, vice chairman of Roth Capital Partners, a U.S. investment bank specializing in emerging markets. The central bank is likely to stop tightening monetary policy after six interest-rate increases since the start of 2007, Los Angeles-based Straszheim said.

China's Politburo, the Communist Party's top decision- making body, said in a meeting July 25 that maintaining ``steady'' growth and fighting inflation were the top priorities.

``Beijing is increasingly fearful that growth will slow to a level which will not create sufficient new jobs to fuel the rapid rise in living standards the country now enjoys,'' Straszheim, former chief economist of Merrill Lynch & Co. said in a note to clients. ``This is striking because inflation is still too high.''

The yuan gained 0.21 percent to 6.8264 per dollar in Shanghai as of 1:05 p.m. today, after yesterday posting the biggest drop since a dollar peg ended in 2005, according to the China Foreign Exchange Trade System.

Exports Cool

The currency has climbed 7 percent versus the dollar this year, exceeding its gains for the whole of 2007, as China sought to rein in inflation that touched an 11-year high of 8.7 percent in February. The yuan's gains cooled China's export growth and sparked concern that the flood of foreign money betting on the currency could rapidly reverse.

Tsinghua's Li said one of the major shifts in policies this year will be slowing yuan appreciation to deter international speculative capital. His university was ranked China's second- best last year, behind Peking University, according to the Times Higher Education - QS World university rankings.

``Most economists agreed the government needs to break the one-way appreciation of the yuan,'' he said.

Slower Growth

China's economy expanded 10.1 percent from a year earlier in the second quarter, slowing from a 10.6 percent pace in the first three months and 11.9 percent last year. The inflation rate reached a five-month low of 7.1 percent in June.

Non-deliverable forwards contracts for the yuan show traders have pared bets for the currency's appreciation. Contracts show traders are betting on a 4.8 percent advance to 6.5140 in a year, approaching the most cautious they've been in more than a month.

The yuan will reach 6.61 per dollar by year-end, according to the median estimate of 24 analysts surveyed by Bloomberg News.

Possible shifts in policy focus later in the year may also include more credit support to small- and medium-sized companies, restoring tax rebates for some exporters and more reforms to tax benefits, according to Li at Tsinghua University.

``Fiscal policy will play a more active role in the economy and monetary policies will be relatively supportive and defensive,'' he said.

`Clear Sign'

The People's Bank of China didn't reiterate the pledge to ``increase the exchange rate's flexibility'' in a statement published July 27 after the second-quarter meeting of the monetary policy.

``The change in the central bank's wording is a clear sign that the yuan's appreciation will slow,'' said Ha Jiming, a Hong Kong-based chief economist at China International Capital Corp., the nation's first Sino-foreign investment bank. ``Even after the appreciation slows, there will still be a slowdown in export growth due to faltering global demand.''

To contact the reporter on this story: Belinda Cao in Beijing at lcao4@bloomberg.net; Judy Chen in Shanghai at xchen45@bloomberg.net.