China will adopt a more flexible exchange rate regime in the next few years, enlarging the floating band of its currency, according to the fourth quarter 2006 monetary policy report released by the People's Bank of China Friday.

 

Coming hot on the heels of the bank's work conference held in January, this is the second time this year that the central bank has stressed the need for a more flexible yuan.

 

Experts said the more flexible bands mean that the yuan is likely to rise in 2007.

 

The yuan gained in value on 135 trading days out of 243 last year, but fell on the other 108 days, the report said.

 

The yuan has appreciated by a combined 5.99 percent since China in July 2005 ended a decade-long peg to the dollar in favor of a managed float.

 

The yuan climbed to a new high against the U.S. dollar on Feb. 7, reaching a central parity rate of 7.7496 yuan to the dollar.

 

Last year's largest daily appreciation was 124 basis points, and the biggest fall 203 basis points.

 

Movement averaged 40 basis points per day in 2006, well above the 17 points in 2005.

 

The daily floating band of the yuan against the U.S. dollar currently stands at 0.3 percent.

 

The report forecast that China's economic growth will slow slightly in 2007.

 

Observers said a slightly faster appreciation of the yuan will have limited impact on China's foreign trade.

 

The Chinese economy has chalked up double-digit growth for four years in a row, with GDP surging 10.7 percent in 2006.

 

But there are problems in the Chinese economy, the report said, noting that it is not easy to rein in credit and investment growth and that the nation's international payments situation remains fundamentally unbalanced.

 

"The risk of inflation is increasing," it said.

 

Housing prices are still rising rapidly in many major cities despite the macro-control measures taken by the government.

 

Beijing and Shenzhen recorded the fastest growth in house prices, up 10.4 percent and 10 percent respectively

 

Overall, housing prices in 70 major Chinese cities rose 5.5 percent in 2006, 2.1 percentage points lower than a year earlier.

 

The bank will also have to tackle excessive liquidity in the banking system next year as massive trade surpluses are expected to continue.

 

China's huge foreign exchange reserves, a direct result of the rocketing trade surplus, has made the excess liquidity issue all the more urgent.

 

The central bank drew three trillion yuan of excess currency from commercial banks by issuing certificates between 2003 and 2006.

 

It has also ordered lenders to raise the deposit reserve ratio by three percent in the past three years, which is estimated to have taken one trillion yuan out of circulation.

 

(Xinhua News Agency February 10, 2007)