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Yuan Gains Stall, May Be Near Equilibrium: Wen

Published: March 14, 2012 | 8:34 am
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Chinese Premier Wen Jiabao said that home prices remain far from a reasonable level and relaxing curbs could cause “chaos” in the market, indicating no imminent relaxation of cooling measures.

“We must not slacken our efforts in regulating the housing sector,” Wen said at a press conference in Beijing today, according to an English translation. A bursting property bubble would hurt the entire economy, and the government wants “long- term steady and sound growth” in housing, he said.

Chinese stocks slumped on concern that prolonging the government’s crackdown on real-estate speculation will deepen a slowdown in the world’s second-biggest economy. Wen’s comments mean the government will probably maintain property curbs for most of this year at least, said Cui Li, a Hong Kong-based economist at Royal Bank of Scotland Plc who previously worked at the International Monetary Fund.

The nation will see a “further decline in property prices especially in major and coastal cities with high price-to-income ratios,” said Chang Jian, an economist at Barclays Capital in Hong Kong who formerly worked for the World Bank. The “robust growth in property investment” seen in January and February “will not be sustained,” Chang said.

The Shanghai Composite Index slid 2.6 percent as of 2:53 p.m. local time, heading for the biggest decline since Nov. 30. In a sign that the government may be taking more steps to support growth, China is easing restrictions on lending capacity at three of the nation’s four biggest banks, officials at the lenders with knowledge of the matter said.

Losing Gains
Wen said that if the government loosened property restrictions, “past gains will be lost and there will be chaos in China’s housing sector.”

China’s factory output in the first two months rose the least since 2009, while retail sales increased less than economists predicted and inflation eased to the slowest pace in 20 months, data showed last week.

Wen also said that the yuan may be near an equilibrium value and that policy makers will allow greater movement in the exchange rate. The currency is down 0.7 percent this year against the dollar after gaining 4.7 percent in 2011.

The yuan “may possibly have reached an equilibrium level” based on trading in Hong Kong since September, Wen said at the press conference, according to the English translation. The government will “continue to enhance reform of the exchange- rate mechanism, especially to allow relatively wider, two-way fluctuation,” he said in Chinese.

More Volatility
“The currency will be more volatile” this year even as “modest” gains are still likely, said Dariusz Kowalczyk, a Hong Kong-based strategist at Credit Agricole CIB. “This explains this week’s yuan moves,” especially as Wen highlighted a current-account surplus that dropped to 2.8 percent of gross domestic product last year, Kowalczyk said.

The yuan weakened as much as 0.3 percent today to 6.3471, the lowest level against the dollar since Dec. 20 and the third straight decline, before trading down 0.2 percent at 6.3371 at 2:53 p.m. in Shanghai.

Elsewhere in Asia, Sri Lanka left benchmark interest rates unchanged today while South Korea said that the number of people with work rose in February for the first time since October. The nation’s jobless rate was 3.7 percent.

India may report today that wholesale price inflation accelerated last month, according to the median estimate in a Bloomberg News survey of economists.

The European Union’s statistics office may say euro-area inflation picked up in February to 2.7 percent, a survey indicated. European industrial production fell for a second month in January, the statistics office may say.

U.S. Data
In the U.S., a Labor Department report is forecast to show prices of imported goods rose in February for the third time in four months, while the Mortgage Bankers Association will release data for loan applications. The Commerce Department may say the U.S. current-account deficit widened in the fourth quarter to $115 billion, a separate survey showed.

China’s home sales declined 25 percent in the first two months of the year after surging 26 percent in January and February of 2011. The government’s two-year effort to control the property market included measures from raising down-payment and mortgage-rate requirements, imposing property taxes for the first time in Shanghai and Chongqing, and home purchase restrictions in about 40 cities.

In a March 5 speech, Wen said the government “will strictly implement and gradually improve policies and measures for discouraging speculative or investment-driven housing demand, build on progress made in regulating the real estate market, and bring property prices down to a reasonable level,” he said.

Even so, the property slowdown had prompted speculation officials would ease rules on concern about the broader economy, with Helen Qiao, Morgan Stanley’s chief economist for Greater China, saying last month that pressures from provincial and city governments may lead to a relaxation of home-buying curbs by the end of March or early in the second quarter.

businessweek

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