China should let the yuan currency move more freely to gain flexibility in conducting monetary policy and help to reduce global economic imbalances, EU Monetary Affairs Commissioner Joaquin Almunia said on Tuesday. Almunia noted that China had promised to change its exchange rate regime gradually but he said progress had been rather slow.
"A more vigorous approach to reform is needed to prevent the current account surplus from expanding further and to reduce the risks to the global economy," he said in a speech at Beijing's Tsinghua University. The World Bank forecasts that China's current account surplus will reach 12 percent of gross domestic product this year, up from 9.5 percent in 2006.
"In addition, a more flexible exchange rate policy would allow the central bank to raise interest rates and curb investment - in the long run, this would help China to rely less on exports and more on consumption and investment geared towards the domestic market," said Almunia.
To hold down the yuan, the People's Bank of China buys most of the dollars flowing into the economy from its huge trade surplus and investment inflows. It then sells bills to mop up the cash it has injected into the banking system.