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China rate hike not likely until Q2 2007

(Reuters)
Updated: 2006-10-13 15:35

Further increases in the required reserve deposit ratio this year in response to a rising trade surplus are also likely to be on the agenda, Hong-Kong based RBS economist Ben Simpfendorfer said in a note published on Thursday.

China is not likely to let the yuan increase much over the next 12 months amid worries that any sharp appreciation against the dollar will hurt demand for cheap Chinese exports and consequently employment and demand.

On Thursday, the PBOC vowed to keep the yuan steady.

Fan Gang, a member of the central bank's monetary policy committee, warned this week against any rapid rise in the currency, adding that 5 percent appreciation per year would make a significant contribution to reducing global trade imbalances.

That will likely frustrate the Group of Seven rich nations which in September appealed for more rapid appreciation to even out global imbalances. U.S. Treasury Secretary Henry Paulson also pressed Beijing to let the yuan rise on a recent visit there.

The yuan has risen around 2.5 percent since Beijing revalued it by 2.1 percent to 8.111 and de-pegged it from the dollar in July 2005 and has retreated slightly after repeatedly hitting its highest levels since then in late September.

China's trade surplus is on course to hit a record $158 billion this year according to government-backed think-tank Chinese Academy of Social Sciences (CASS), while a huge U.S. trade deficit has stoked a wave of protectionism there.

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