China's central bank, manager of the world's largest foreign currency reserves, has said it will let foreign companies sell yuan-denominated bonds this year, possibly increasing demand for China's currency.

 

"It makes more sense for foreign companies to sell yuan bonds than having them convert currencies into the yuan for China investments," Wu Xiaoling, vice governor of the People's Bank of China, said at the annual session of the Chinese People's Political Consultative Conference in Beijing on Saturday.

 

There aren't any policy obstacles preventing foreign companies from selling yuan bonds, and the bank may approve the first sale as early as this year, Wu told reporters.

 

China is seeking to expand its bond market to reduce its companies' reliance on bank loans and to give investors more choice. International Finance Corp, the World Bank's investment arm, and the Asian Development Bank became the first overseas institutions to sell yuan-denominated bonds in China in 2005, Bloomberg News said.

 

The central bank has let the yuan's gains accelerate since scrapping its peg against the US dollar in 2005. US Treasury Secretary Henry Paulson will visit Beijing this week to renew pressure on China to abandon controls on the yuan in response to US lawmakers' contention that the country is keeping its currency artificially weak to boost exports.

 

China will maintain the current "direction" of the yuan's gains against the US dollar and will "determine the pace of the gains," Wu said.

 

The yuan weakened to 7.7465 per US dollar as of 5:29 PM in Shanghai on Friday, according to the China Foreign Exchange Trade System. The currency has risen 6.7 percent since scrapping the peg of about 8.3 to the US dollar.

 

The yuan's current "pace of appreciation is appropriate" and flexibility is "according to our own plan and the extent to which the economy can afford," central bank Governor Zhou Xiaochuan said on Feb. 9 in Essen, Germany.

 

China's currency reserves surpassed US$1 trillion last year, the world's largest holdings of foreign currencies. The government won't reduce its holdings of US Treasury bonds and other forms of dollar-denominated debt, Wu said, without elaborating.

 

China still faces inflationary pressure and the central bank is "actively" monitoring price trends, Wu said. Recent price rises of agricultural produce are unlikely to continue, she said.

 

China's inflation accelerated to 2.8 percent in December, the fastest monthly gain in 22 months, government data show.

 

(Shanghai Daily March 5, 2007)