The World Bank yesterday (March 17) urged China to let its currency rise and rein in its loose money policy.
It warned that inflation risks and asset bubbles may get in the way of China's strong economic growth this year.
'Strengthening the exchange rate can help reduce inflationary pressures and rebalance the economy,' the bank said in its quarterly report on the Chinese economy, which raised its 2010 forecast for China's growth rate to 9.5 per cent.
This is well above the 8 per cent target that Premier Wen Jiabao announced last week, as well as the 8.7 per cent growth rate that China achieved last year.
Consumption and a bounce-back in exports are likely to drive growth, even as Beijing pares down its stimulus-funded investment spree, said the World Bank.
But the worry for China now is its asset bubbles, Louis Kuijs, a senior World Bank economist, told a media briefing yesterday. "Price rises on the property market could reach a level that is not healthy."
The bank has recommended that China adopt a tighter monetary policy - in the form of an exchange rate appreciation, higher interest rates and tighter credit - to tackle the risks.
Allowing the yuan to float would also give China more control over its own money policies instead of being effectively tied to those of the United States via the yuan's peg to the greenback, which is currently at a rate of about 6.83.
"Over time, more exchange rate flexibility can enable China to have a monetary policy independent from US cyclical conditions, which is increasingly necessary," the bank said.
Its comments coincided with the International Monetary Fund's (IMF) call for China to let the yuan appreciate to help remove global economic imbalances.
Speaking at the European Parliament in Brussels, IMF managing director Dominique Strauss-Kahn urged countries such as China and Germany that have trade surpluses to boost their imports by increasing domestic consumption. This would, in turn, help the yuan rise naturally.
"The yuan is very much undervalued" and it is logical that with the world economy regaining its balance, the yuan "will appreciate", he said.
But China so far has been resistant to growing pressure from the US and the European Union which say its undervalued yuan gives Chinese exporters an unfair advantage. More than 100 US lawmakers called on Monday for the Obama administration to slap duties on Chinese exports if China fails to revalue its yuan.
Yesterday, He Yafei, China's new ambassador to the United Nations in Geneva, dismissed their demands as ill-founded. "I don't think the call...is well founded on facts. They should not blame the problems they have by finding a scapegoat in China," he told a briefing.
Premier Wen and other Chinese leaders have all staunchly rebuffed such demands to revalue the yuan, reiterating the standard line that China's recovery is not solid and therefore requires a basically stable yuan.
