China Institute Proposes Weaker Yuan to Boost Growth

Feb. 7 (Bloomberg) -- China should “actively guide” the yuan’s exchange rate to about 6.93 against the dollar to help maintain economic growth and bolster employment, according to a report by the Ministry of Finance’s research institute.

The nation should also increase purchases of commodities from abroad and build up energy reserves to offset pressures on the Chinese currency to rise, said the report, published today in the Shanghai Securities News.

Rising labor costs and a stronger yuan have slowed overseas shipments of Chinese-made textiles, toys and machinery as the worldwide recession saps demand. The People’s Bank of China wants to avoid big movements in the yuan and the global crisis will be the key determinant of currency policy, Governor Zhou Xiaochuan said this week in Beijing.

“Depreciating the currency would be little help,” Li Wei, a Shanghai-based economist at Standard Chartered Bank Plc, said today in an interview. “The slowdown in exports is mainly due to lack of demand.”

The world’s third-largest economy will continue to slow in the first half, the ministry report said. Growth will “stabilize” in the second half thanks to the government’s stimulus measures. China in November announced a 4 trillion yuan ($585 billion) spending plan to boost growth.

Rates Cut

The central bank should continue to cut lending rates “by relatively large margins” in the first half to boost investment and prop up the real estate and stock markets, today’s report said. China has cut interest rates five times since September.

Deposit rates should also be lowered further to benchmarks in U.S. and other markets to help maintain a “normal” exchange rate level, the report said. China’s one-year deposit rate stands at 2.25 percent, with the lending rate at 5.31 percent.

The Chinese economy expanded by 6.8 percent in the fourth quarter, the slowest pace in seven years. The yuan traded at 6.8344 a dollar at the 5:30 p.m. close in Shanghai yesterday, from 6.8367 per dollar the day before, according to the China Foreign Exchange Trade System.

The yuan’s level of about 6.83 against the dollar is “slightly lower” than the average costs 65 major textile companies in east China’s Jiangsu Province pay for each dollar they earn from exports, today’s report said. Growth in textile and garment shipments slipped by 10.7 percentage points in 2008.

“Weakening the yuan to boost exports would give ammunition to people accusing China of protectionism,” Li said. “I don’t think this report can represent finance ministry policy.”

The report predicted China’s fiscal revenue to grow by 10 percent this year to 6.7 trillion yuan. Expenditures may rise by 14 percent to 7.2 trillion yuan.

The report, by Yan Kun and Zhang Peng at the research institute, was carried by Xinhua News Agency today.