China says to continue stable monetary policy

Monday, December 25, 2006; 4:40 AM

BEIJING (Reuters) - China's central bank said on Monday that it would continue to take steps to keep investment and credit growth in check, while pressing ahead with efforts to make the value of its currency more market-driven.

In a brief statement on its Web site ( summing up the proceedings of a meeting of its monetary policy committee, the People's Bank of China said that while the economy was generally functioning well, it still encountered some challenges.

"The economic situation is good overall, but it still faces problems such as an structural imbalances, an overly resource-intensive growth model and imbalanced international payments," the central bank said.

It said that it would continue to implement a stable monetary policy, while trying to improve its control over liquidity in the banking system. It did not elaborate.

The central bank has raised interest rates twice this year and banks' reserve requirement ratios three times, as part of a broader campaign to rein in a credit-fuelled investment boom. That campaign has also involved administrative measures such as stricter approval procedures for new investment projects.

In response, annual growth in fixed-asset investment slowed to 26.6 percent in the first 11 months from a peak of 31.3 percent in the first half.

The central bank also reiterated its long-standing vow to allow market forces to play a greater role in determining the value of the yuan, while keeping the currency "basically stable at a reasonable, balanced level."

Since it revalued the yuan by 2.1 percent and decoupled it from a dollar peg in July 2005, Beijing has frequently said that it was committed to letting the yuan become more flexible over time, but that it must do so at its own pace, despite U.S. pressure to allow it to appreciate more quickly.

The yuan has now appreciated a further 3.7 percent since the revaluation, with the pace having picked up in recent months, but many U.S. critics say it remains seriously undervalued, giving Chinese exports an unfair advantage in global markets.

The central bank also said that it would actively promote domestic consumption, while working to keep prices stable. It did not mention any details of such plans.

Many economists and officials have said that the economy relies too much on fickle investment and exports, and not enough on household consumption, exposing it to greater risks of a downturn and contributing to trade friction.

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