Wen pledges forceful tightening

Beijing, July 26 | Updated: Jul 27 2006, 05:30am hrs
Chinas Premier Wen Jiabao issued a strongly worded warning on Wednesday about the dangers of economic overheating, pledging to implement forceful tightening measures and improve the yuans flexibility. His remarks follow rare comments on the economy by President Hu Jintao late last week and add authority to a growing chorus of officials and economists calling for a crackdown on red-hot investment they say could threaten the stability of the economy.

Fixed-asset investment growth, already rapid, is now accelerating. Growth in money supply and credit is still excessive, and the imbalance of international payments is intensifying, Wen said in a speech published on the central governments website (www.gov.cn). Forceful measures must be taken to help resolve the striking problems that exist, to prevent rapid economic growth from turning into overheating.

Annual economic growth accelerated to an unexpectedly fast 11.3 percent in the second quarter, the fastest pace since 1995. The central bank has raised interest rates and ordered banks to hold more deposits in reserve in an attempt to temper growth, but that has done little to mute calls for further tightening.

The most urgent tasks for the government were to control credit and money supply growth by targeting banks liquidity and tightening control over the supply of land, Wen said.

He also said the government would press ahead with currency reforms for the yuan also known as the renminbi. We should improve the formation mechanism of the renminbis exchange rate, in order to gradually increase the flexibility of the exchange rate, Wen said, without elaborating.

Calls to let the currency rise faster have gained momentum since the release of first half economic data that showed overall fixed-asset investment in that period up 29.8 percent from a year earlier, while the trade surplus jumped a whopping 55%.

Yu Yongding, an influential economist who advises the central bank, said on Wednesday China could afford to let the yuan appreciate further because robust growth will help to cushion export-related job losses. We now have a relatively favourable opportunity to let market forces determine the yuans exchange rate, Yu, head of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, told Reuters in an interview.

Wen reiterated the official line that the country aimed to gradually balance its trade and expand domestic consumption.

He said the government would rely mainly on economic and legal tools to cool the economy, but would employ more invasive administrative measures typically ranging from shutting down inefficient factories to halting redundant construction projects when necessary. The government also needed to continue to strengthen its measures to control the property sector, in order to keep prices from rising out of the reach of ordinary residents, Wen said.

Authorities have taken a series of steps to that end in recent months, including raising down-payment requirements for some homes, limiting the number of high-end flats, and placing restrictions on foreigners purchases of property.

Reuters