China wary of subprime's indirect impact

Zhou Xiaochuan, head of China's central bank, Finance Minister Xie Xuren, and Ma Kai, chairman of the National Development and Reform Commission, held a news conference on China's economy.

Following are highlights:

MUST WATCH SUBPRIME'S INDIRECT IMPACT ON CHINA

Zhou Xiaochuan: We should care about the indirect impact. It may hurt the U.S. economy and the world economy as a whole.... The impact may take the form of "wave after wave" -- in other words, the United States may impact Europe, and Europe may spread that more widely.

As for policies, the United States is cutting rates to deal with a possible economic recession, which has an impact on Chinese policies.

In addition, the United States has taken other measures and whether the policies will worsen the excess liquidity problem is still unknown. China's excess liquidity has been related to excess global liquidity, so if that worsens it may have further repercussions in China.

STILL ROOM FOR INTEREST RATE RISES

Zhou Xiaochuan: As for the room left for interest rate rises, I am sure there is still room.

Of course, U.S. rate cuts have an impact on China's interest rate decisions, but they are not the only consideration. There are also domestic factors.

For instance, we say economic growth should rely more on domestic demand. Interest rates must consider that, too.

Interest rate policy will also have an impact on capital markets. If interest rates were low, people would think about investing in the capital markets, which may boost direct capital raising.

SUBPRIME EXPOSURE OF CHINESE BANKS

Zhou Xiaochuan: Even if they have investments related to subprime, the percentage is small. Chinese banks will be able to absorb it. And their profits are strong; they can withstand it.

NEED MORE INVESTMENT ABROAD

Zhou Xiaochuan: China's savings rate is too high, and if all the money was used at home, investment would be too hot and may result in over-capacity. Given these circumstances, part of the money certainly should be invested abroad.

OPTIMISTIC ABOUT INFLATION TARGET

Ma Kai: As for whether the 4.8 percent CPI target can be achieved, how should we see this? I want to say three things: we are determined to do so, we have the right conditions and we have the right measures.

Preventing economic over-heating and broad-based inflation are still our top priorities, and preventing broad-based inflation in particular will be put at the top of agenda.

INFLATION STILL CONFINED TO FOOD

Ma Kai: "I believe current price rises are still sectoral increases caused by agricultural products, which is different from broad-based, continuous and persistent inflation."

MARKET FORCES ARE KEY TO YUAN'S EXCHANGE RATE

Zhou Xiaochuan: The degree of exchange rate change is more up to market forces, or the supply and demand expectations of exchange rate moves, as well as trading activities.

In addition, the exchange rate is not only based on market supply and demand but also with reference to the basket of currencies.

Exchange rate movements of the dollar, euro and yen are closely watched not only by the central bank but also by market players, and they will act accordingly in the market. Market players are very mature, and they also care about monthly trade data and foreign investment levels.

YUAN APPRECIATION

Zhou Xiaochuan: From an analytical point of view, proper yuan appreciation, or faster yuan appreciation, would be helpful in controlling inflation. But the help won't be huge for such a big country as China.

So the exchange rate should not be a key measure in fighting inflation. For China, with a 1.3 billion population, inflation control should rely mainly on domestic policies, namely monetary tightening.

In my personal view, it is unnecessary to use the exchange rate to fight inflation.

TAMING LIQUIDITY

Zhou Xiaochuan: If we tame liquidity to zero and squelch all investment enthusiasm, that would not be a success but a failure.

There are lots of uncertainties, like fast-rising prices and the impact of the subprime problem.

INFLATION

Ma Kai: China is now facing increasing inflationary pressure and excessive liquidity problems at home. These are not only Chinese problems but also worldwide and global issues, which will definitely have an impact on China and create difficulties for macro-economic controls.

INVESTMENT, CREDIT AND TRADE GROWING TOO QUICKLY

Ma Kai: There are still problems with the current economy ... investment is growing too fast, the supply of credit is still too high and the trade surplus is still excessive.