Exports contract, domestic consumption grows and the yuan hits historic record against US dollar. The People’s Bank of China raises reserve ratio for banks, drawing fire from critics who believe this will deprive it of necessary flexibility without touching inflation.

Beijing (AsiaNews/Agencies) – Manufacturing growth slowed down in the past seven months as inflation picked up, this according to early data. Experts note government policy to limit liquidity in the economy is showing its limits. In the meantime, the yuan hits a new record against the US dollar.

Industrial growth weakened in February, survey results show (official results are expected in two weeks) as new orders rose at a slower pace, whilst foreign orders actually contracted. Domestic consumption instead actually rose. The slowdown was partly due to the Lunar New Year, which traditionally falls in February.

Inflation instead continued its upward spiral, up 4.9 per cent in January and expected to average between 5 and 6 per cent this year, with especially steep rises in the first half of 2011.

Chinese authorities are trying to contain inflation by letting the yuan appreciate. For the third consecutive day, the Chinese currency gained against the US dollar, reaching 6.5658 per dollar earlier today, compared to 6.5731 last Friday.

Since June 2010, the yuan gained 3.97 per cent against the US currency, 26 per cent since July 2005. Still, experts agree the yuan is still undervalued and should appreciate further, by 30 per cent according to US sources.

The People's Bank of China (PBOC) on Friday lifted commercial banks' reserve ratio for the second time this year to absorb excess liquidity in the system and curb inflation. In the past year, the reserve ratio was raised several times, reaching 19.5 per cent for large banks and 17.5 per cent for smaller ones.

However, the policy has come under fire. Many experts believe this approach can only marginally affect prices given the fact that loans worth more than 1 trillion yuan were handed out this January compared to 974 billion a year earlier.

Draining liquidity from banks also runs the risk of limiting the PBOC’s flexibility because raising the ratio too much might prevent the bank from cutting them when more liquidity is needed without negative repercussions, said Lu Ting, an economist with the Bank of America-Merrill Lynch.

In the meantime, interest rates and reserve ratios are expected to rise further by June.

• china
• economics
• inflation
• industry
• manufacturing
• trade
• exports
• yuan
• currency
• loans
• banks