Faster yuan rise on cards - China Central Bank adviser

BEIJING, June 23 (Reuters) A faster rise in China's yuan is quite possible, an adviser to the central bank said on Friday, adding that a stronger currency would reduce liquidity and make monetary policy easier to manage.

Yu Yongding said allowing the yuan to rise would mean banks would not have to sacrifice profitability as they did now by having to buy so many bills issued by the central bank to mop up liquidity caused by its attempts to stabilise the yuan.

Yu, who sits on the monetary policy committee of the central bank but stressed his comments reflected his personal view, said banks now had to buy central bank bills yielding about 2 percent.

That compared with the near 8 percent yield banks obtain by lending to customers, he said.

''Due to both internal and external pressure, perhaps we have to sacrifice our exchange rate somewhat so that we can reduce runaway investment growth,'' said Yu, whose comments were posted in a live broadcast on a Chinese Web site (www.sina.com).

''At the same time, this will not affect operations of commercial banks,'' he said.

Yu, who has long advocated a gradual yuan rise, said the pace of appreciation could pick up.

''It's quite possible that the yuan will appreciate at greater speed,'' he said.

Exporters needed to prepare for a stronger yuan, he said.

Yu also said the government needed to tighten monetary policy to rein in excess liquidity and runaway fixed-asset investment growth, which accounted for 48.6 percent of GDP.

''Fixed-asset investment is growing well above that of GDP and this is not sustainable,'' he said. ''Therefore, we must tighten monetary policy.'' But Yu said China might have to tread cautiously in raising interest rates due to concerns about the impact on the yuan.

Beijing took its latest tightening step last Friday when it raised the proportion of money banks must keep in reserve by half a percentage point. It hoisted interest rates in April.

Analysts expect more tightening as Beijing wages a battle against a destabilising credit boom which has prompted fears the nation's boom could turn to bust.

REUTERS PV HS1601