Weak dollar troubles Beijing

By Richard McGregor in Beijing

China is “deeply worried” about the state of the US and global economies and about the impact from the continuing weakness of the dollar against other currencies, Wen Jiabao, the country’s premier, said on Tuesday.

Mr Wen, speaking at his annual news conference at the close of the National People’s Congress, said he was confident China would maintain “fast and steady” growth this year. But it could not avoid the impact of a downturn elsewhere.

“Global economic developments cannot but have an impact on China,” he said. “2008 might be the most difficult year for China’s economy, because there are a lot of uncertainties both inside and outside the country.”

Chinese policymakers are grappling with conflicting pressures, trying to control inflation, which has hit 12-year highs, without slowing the economy too much when they need to create millions of new jobs a year.

Mr Wen acknowledged that China might struggle to keep inflation to its forecast figure for 2008 of 4.8 per cent, after January and February recorded monthly inflation rates of 7.1 and 8.7 per cent respectively.

But he said he had not changed the goal because it underlined the government’s determination to fight inflation. “When prices rise fairly fast, inflationary expectations become more dangerous than price rises themselves,” he said.

On the issue of whether he would sacrifice economic output to bring down inflation, at the risk of increasing unemployment, Mr Wen indicated that growth re­mained the overarching priority. “We must ensure that our economy will grow...in order to ensure employment,” he said. “China is a developing country with 1.3bn people. We have to maintain a certain degree of fast economic growth to provide enough jobs.”

He said China needed to add about 10m jobs a year for the next five years, a lower figure than in the past when the aim was growth of 15m-20m jobs a year.

Mr Wen said it was “particularly noteworthy” that the renminbi, China’s currency, had been appreciating more rapidly in recent months, but he expressed concern about persistent US dollar weakness. “What concerns me now is the continuous depreciation of the US dollar and when the dollar will hit bottom,” he said.

The renminbi has appreciated by about 15 per cent since mid-2005 against the US dollar but has weakened against the euro during the same period, to the rising anger of Brussels.

While exporters in China have opposed a strengthening of the renminbi, the government increasingly sees it as a weapon to combat inflation by lowering import prices and helping to moderate the trade surplus.

The government has been reluctant to raise interest rates in the fight against inflation, for fear of attracting further speculative capital inflows and increasing pressure on mortgage ­holders.

In the place of higher interest rates, the central bank has been increasingly using increases in banks’ reserve ratios to drain money from the system, with the 15th increase since mid-2006 announced on Tuesday. The 0.5 per cent rise in the ratio, the amount of money commercial banks must leave on deposit with the People’s Bank of China, now leaves the reserve requirement for large lenders at 15.5 per cent.