China c.banker reiterates tightening, freer yuan

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BEIJING, Nov 3 (Reuters) China will redouble its efforts to soak up liquidity in the banking system via open-market operations and higher deposit reserve requirements, a vice central bank governor said on Saturday.

Wu Xiaoling, vice governor of the People's Bank of China, also reiterated Beijing's plan to increase the flexibility of its currency regime and, ultimately, make the yuan fully convertible.

Wu, speaking at a forum in Beijing, said the bank would enhance its efforts in keeping credit and money supply in check as a way of stabilising market anticipations of inflation.

In doing so, Wu said the bank would rather use ''quantitative tools'', namely central bank bills issuance and required deposit reserve ratio increases, rather than ''price tools'' -- interest rates and exchange rates.

''Some people said that the central bank was turning to administrative control (instead of market-based fine-tuning) because the central bank was using more quantitative tools than price measures,'' she said.

''But China's reforms are a gradual process, and no reform can go forward alone. A proper market environment should be there so that the central bank can use more price tools, otherwise a hurried move just causes unnecessary market fluctuations,'' Wu said.

China has raised interest rates five times this year and banks' required reserves eight times.

Similarly, she said currency reform would take the same gradual approach in building up a market-based exchange rate system.

''The yuan exchange rate issue is not a problem about the rate itself but a problem with China's overall economic structure,'' she said.

''China's twin surpluses in international payments are not a simple financial issue but a reflection of our nation's overall economic condition.'' But Wu warned Chinese lenders that they would not enjoy the current large deposit and lending interest rate gap for ever.

China currently sets a ceiling for deposit rates and a floor for lending rates, and Chinese lenders enjoy a government-decided rate gap of 3.5 percentage points.

''In our view, we regard this a transitional phenomenon, and we have no intention of keeping this forever,'' said Wu.

She said Chinese banks should take advantage of this to change their business model, relying less on the lending business.

REUTERS SR DS1350

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