Wen says yuan forex rate among tools to combat inflation

BEIJING (Reuters) – China will use all possible measures, including the yuan exchange rate, to keep prices under control, Chinese Premier Wen Jiabao was quoted by the official Xinhua news agency as saying.

This is the first time Wen has publicly acknowledged that the exchange rate of the yuan is key to combating inflation. China has in the past used interest rates and bank deposit reserve ratios to keep a lid on prices.

“We must make good use of various pricing and quantitative tools, including open-market operations, bank deposit reserve ratio, interest rates and exchange rates, to manage monetary factors in inflation,” Xinhua Wen as saying during a recent visit to the eastern province of Zhejiang.

Many economists have been arguing that China should give the yuan exchange rate a bigger role in taming inflation. Zhou Xiaochuan, the People’s Bank of China governor, said in March that the yuan plays only a secondary role among China’s options to temper inflation.

It is not clear if Wen was hinting that China would allow a faster yuan appreciation in the face of rising international commodity prices.

In response to a direct question on whether China will allow the yuan to rise faster to control inflation, Wen said in March that China would make the yuan exchange rate more flexible but the process of appreciation would be gradual.

China reported a trade deficit of $1.02 billion in the first quarter of this year, the first quarterly deficit for China since 2004, partly due to rising prices of raw materials and resources.

China has faced calls from the United States, the European Union and others to let its yuan currency appreciate more quickly as a way to cut its yawning trade surplus.

Beijing has opted for gradual nominal appreciation — the yuan has gained just 4.5 percent against the dollar since being depegged last June.

A poll by Reuters on 22 economists found that China’s consumer inflation may have accelerated to a 32-month-high of 5.2 percent in March. Beijing has set an inflation target of 4 percent for 2011.

China’s central bank has increased benchmark interest rates for four times since last October and has required the country’s big banks to put a record high of 20.0 percent of their deposits with the central bank as reserves.

(Reporting by Zhou Xin and Chen Aizhu, editing by Miral Fahmy)

Wen says yuan forex rate among tools to combat inflation