(Dow Jones, Sep 22, 2006)BEIJING -- Societe Generale SA (13080.FR) said Friday it expects China to widen the daily yuan trading band against the U.S. dollar to 0.5% each way in the first quarter of next year, then gradually widen it to 2.5% each way by the end of 2007. The expansion of the band, now set at 0.3% each way, and further appreciation of the yuan would help curb China's foreign exchange reserve growth, SocGen's chief economist for the Asia-Pacific region, Glenn Maguire, said, adding the U.S. dollar will likely fall to CNY7.90 by December. Maguire's remarks at a financial conference in Beijing come after People's Bank of China Governor Zhou Xiaochuan said during the weekend China will widen the yuan's trading band "sooner or later," and increase the flexibility of China's exchange rate regime. Hot money flows into China, partly fueled by expectations of further yuan appreciation, have contributed to foreign exchange reserve growth in the country, said Maguire. That, economists say, contributes to rising liquidity, easy credit and eventually to overly rapid investment growth, which Beijing fears will result in overcapacity and job losses. Urban fixed-asset investment in August rose 21.5% from a year earlier. China will likely hike lending and deposit rates by 0.27 percentage point in November, with more hikes in the deposit rate likely in the first half of next year, said Maguire. He added that a narrower gap between the lending and deposits rates would encourage consumption, as individual depositors gain more interest income. China has hiked the benchmark one-year lending rate by 0.27 percentage point twice this year, and the one-year deposit rate by 0.27 percentage point in August, to cool loan and investment growth. China could also hike the reserve requirement ratio to between 9.5% and 10%, said Maguire, adding that would discourage banks from extending loans. He didn't give a timeframe. The PBOC has already raised the reserve requirement ratio for most commercial banks twice this year, with the latest move bringing the rate to 8.5%. Each increase was 0.5 percentage point. "One of the better measures" to cool economic growth, said Maguire, is to reduce government controls over energy prices. Passing on higher fuel costs to companies would squeeze corporate profits and investment, he said. Maguire said he expects China's gross domestic product growth will slow to 9% in the third and fourth quarters, and to 8% next year, as the National Bureau of Statistics strips away a larger share of nominal GDP growth to account for price changes. In the first half of this year, China's GDP expanded by 10.9%. -By Terence Poon; Dow Jones Newswires; 8610 6588 5848;
-Edited by Theresa Davidovitz