THE country s large external imbalances, combined with its intervention in the foreign exchange market, were the root cause of the country s inflation problem, Yi Gang, vice governor of the People s Bank of China (PBOC), said Saturday.
China should increase the flexibility of the yuan exchange rate and undertake a number of internal structural changes to reduce its trade surplus, Yi said. China s focus should be on boosting imports rather than suppressing exports, he said.
In a wide-ranging lecture at a university in Beijing, Yi also said China should adjust resource prices to address imbalances, as many resources were still traded in China at below their natural prices. China also should boost wages and social benefits to lift consumption, step up its enforcement of environment regulations and undertake other structural reforms to address imbalances.
After the PBOC buys up foreign exchange inflows, it attempts to sterilize or offset the newly created money supply by ordering banks to hold more funds in reserve and by issuing central bank bills. But Yi said such sterilization operations had costs to the central bank, as it had to pay interest to banks on the bills and the reserve funds that they park with the central bank.
Many in China argue that inflows of hot money, short-term capital that seeks to benefit from yuan appreciation and interest-rate arbitrage, are also a main factor behind China s foreign reserve accumulation and a source of imported inflation pressures.
However, estimates released last week by the State Administration of Foreign Exchange showed such hot money inflows to be relatively limited, with just US$35.5 billion of net inflows last year. Yi said the figures demonstrate that hot money inflows accounted for a small part of total reserve accumulation and that China s current and capital account surpluses were the main factor.
Some analysts said SAFE s figures likely underestimated the true level of hot money inflows, as many such inflows were deliberately disguised as ordinary current account transactions. Yi said this took place to a certain degree but defended the overall accuracy of SAFE s estimates. (SD-Agencies)
