CHINA should tighten monetary policy, allow its currency to strengthen and try to cool the economy, said Yu Yongding, a former adviser to the People's Bank of China.
"Somehow we have to tighten monetary policy and allow the yuan to appreciate further," Yu said in an interview with Bloomberg News yesterday from Jeju, South Korea, on the sidelines of a meeting of Asian and European finance ministers. "We also should be very careful because this is a year of global slowing down due to the subprime crisis."
The yuan has gained 1.6 percent versus the US dollar this quarter, the best performance among the 10 most-traded currencies in Asia outside Japan, according to data compiled by Bloomberg. A government report said last week that China's money supply grew in May at the fastest pace in four months, adding pressure on the central bank to curb inflation.
Inflation slowed to 7.7 percent in May, from 8.5 percent in April, still exceeding the government's annual target of 4.8 percent, the statistics bureau said.
China can withstand a rise of its currency and a stronger yuan would help in easing accelerating inflation, Yu said.
"I think it's helpful but I'm not saying it's the most important instrument because there are other instruments, for example; monetary tightening, higher interest rates," Yu said. China should try to prevent "hot money from coming into China while raising the exchange rate," he said.
China has kept interest rates on hold this year to avoid attracting more speculative capital from abroad into an economy already flooded with cash. The key one-year lending rate is 7.47 percent, and the equivalent for deposits is 4.14 percent.
The central bank has said the economy was shifting from "heated" to more stable growth after a 10.6-percent rise in the first quarter.