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`Devaluating' Dollar Is a Concern, China Monetary Adviser Says

By Stephanie Phang

Oct. 19 (Bloomberg) -- China's government is concerned about the risk of further declines in the U.S. currency, said Fan Gang, a monetary policy adviser to the People's Bank of China.

The ``dollar problem is getting worse,'' said Fan, a member of the PBOC's monetary policy committee, who is also director of the National Economic Research Institute, a privately funded research agency. China is concerned if the dollar continues ``devaluating,'' he said in an interview in Washington today.

China has come under pressure from U.S. officials for limiting gains in its currency and Fan's comments came before a Group of Seven statement expected to call for a stronger yuan. Fan said that the dollar's decline against the euro showed that there is a ``problem'' with the U.S. currency.

U.S. Treasury Secretary Henry Paulson, along with European and Canadian officials, have pressed for greater exchange-rate flexibility from China to help ease the country's trade surpluses. Canadian Finance Minister Jim Flaherty told reporters in Washington today that it ``wouldn't be surprising'' if the G-7 steps up its pressure on China today.

Central bankers and finance ministers from the G-7, which includes the U.S., Japan, U.K., France, Germany, Italy and Canada, are expected to release a statement after 6 p.m. in Washington after their meeting.

Wu Remarks

PBOC Deputy Governor Wu Xiaoling said that exchange rates play a limited role in alleviating trade imbalances. Speaking at a conference before attending annual meetings of the International Monetary Fund and World Bank this weekend, Wu said China aims to restructure its economy to help deal with the trade surplus.

Wu also said that dealing with the yuan without restructuring China's economy could hurt its growth, undermining the global economy.

Fan said in the interview that China's economy is ``overheated but it's not accelerating,'' predicting an expansion this year of 11 percent or ``maybe more.'' Gross domestic product probably increased 11.3 percent or 11.4 percent in the third quarter, he said.

Inflation in China will probably be ``easing or stabilizing,'' he said, in part because an increase in food supplies will help damp consumer prices.

Policy makers are concerned about ``bubbles'' in China's stock and real-estate markets and are trying ``to do everything they can'' to deal with them, Fan said. The surge in Chinese equities is in part a catch-up from stagnation in past years, he said.

China's economy, the world's fourth largest, expanded 11.9 percent in the second quarter from a year earlier, the fastest pace in more than 12 years. The central bank has increased its benchmark rate five times this year to cool property investment, lending and inflation in the world's fastest-growing major economy.

To contact the reporter on this story: Stephanie Phang in Washington at [e-mail] .

Last Updated: October 19, 2007 13:26 EDT

http://www.bloomberg.com/apps/news?pid=20601068&sid=aIYEO5Wqw_r0&refer=economy