China to Slow Yuan Gains for `Steady' Growth, Researcher Says

By Belinda Cao

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 China's top university. ``That goes against the central government's goal of stable growth set in the recent Politburo meeting.''

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 for the world's fastest-growing major economy in the second half of 2008, according to a statement posted on the government's Web site.

The yuan dipped 0.3 percent to 6.841 per dollar in Shanghai yesterday, the biggest drop since a dollar peg ended in 2005, according to the China Foreign Exchange Trade System.

The currency has climbed 6.9 percent versus the dollar this year, matching 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 created concerns that the flood of foreign money betting on the currency could rapidly reverse.

Li said one of the major shifts in policies this year will be slowing yuan appreciation to deter international speculative capital.

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

Economy Slows

China's economy grew 10.1 percent in the second quarter, slowing from 10.6 percent in the first three months and 11.9 percent last year. Growth in consumer prices slowed to 7.1 percent in June.

The Politburo's concern that a global slowdown will undermine China's boom prompted China's 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.

``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.''

Tax Rebates

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.

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