China to pursue greater yuan flexibility

BEIJING, Aug 2 (Reuters) China is succeeding in slowing the momentum of money and credit growth but cannot afford to drop its guard, the official Xinhua news agency on Wednesday quoted the central bank as saying.

In an article on its Web site (www.xinhuanet.com), Xinhua said the central bank would continue to pursue structural adjustment policies, including greater yuan flexibility, with the aim of achieving a better balance in China's external payments.

In reviewing its work in the first half, the People's Bank of China noted that the tightening measures it has taken in the past months, which have included an interest rate increase and two rises in banks' reserve requirements, were starting to work.

''Looking at the near-term situation, the momentum of rapid growth in money supply and credit has been contained to some extent as the policy measures gradually take effect,'' the central bank said.

But it noted that strong demand for credit among investors and a push among commercial banks to achieve better returns had fuelled a growth in credit that needed to be guarded against.

''Rapid growth in money supply and credit has come in tandem with rapid growth in fixed-asset investment, and they promote one another. If we let them develop further, it might trigger serious consequences,'' the central bank said.

The bank would continue to implement a stable monetary policy, but would closely watch any changes in the domestic or global economy and respond with flexible, pre-emptive measures, it said.

It added that considering that China's economy had been growing at around 10 percent per year and that investment growth was still rapid, it still needed to pay close attention to inflationary risks.

''As a next step, we should take a package of measures to promote better balance in external payments,'' it said, adding that it would focus on structural adjustments including increasing the flexibility of the yuan .

It would also seek to expand domestic consumption, lower savings rates, increase imports, expand private investment, and encourage firms to invest overseas, the central bank said.

REUTERS SBA BD2303