(Forbes, Oct 25, 2006) - China should introduce more flexibility in the yuan exchange rate to help reduce imbalances in the economy, Yu Yongding, a former central bank adviser said in a speech to investors at a Credit Suisse investment conference.

Yu, a member of the central of the central bank's monetary policy committee until August, also recommended that the capital account be liberalized further.

The twin current and capital account surpluses are the major sources of China's excess liquidity, and the government should increase capital expenditure to help shift the economy towards consumption-led growth and to strengthen the country's social safety net, Yu said.

Yu also addressed concerns over structural problems in China's economy and large foreign reserves.

'China does not need too much foreign reserves, it should reduce the accumulation rate of foreign reserves as a first step,' Yu said.

By the end of September, China had 987.9 bln usd in foreign exchange reserves.

Policy measures have so far been aimed at slowing the pace of accumulation -- such as through currency appreciation and cuts to export tax rebates -- and allowing increasing amounts of hard currency to flow out of the country via the capital account.

Yu also stressed the importance of curbing the rate of investment growth, as excess investment in the short run pumps up energy and raw material prices, but could lead to deflation, and even recession, in the longer run, by creating overcapacity.

'If we don't take action now, if we delay taking strong action, to control fixed-asset investment, then sooner or later we'll have to do it but on a much larger scale,' Yu said.

Source:Forbes
tag:China economy