China's Wen vows to increase yuan flexibility to curb inflation

China should make its currency more flexible to help rein in price rises driven by imported inflation, Chinese Premier Wen Jiabao said in remarks published by the official Xinhua news agency on Thursday. Wen's comments appeared to reinforce market expectations that the government will let the currency play a bigger role in curbing inflation.
The yuan hit a record high of 6.531 to the dollar on Thursday, the latest in a series of records as the central bank ramps up the pace of appreciation. "We will further improve the renminbi (yuan) exchange rate formation mechanism, increase the flexibility of the renminbi exchange rate and eliminate monetary conditions for inflation," Xinhua quoted Wen as saying at a cabinet meeting on Wednesday.
The government has vowed to use all tools at its disposal to stabilise prices and wrestle inflation under control, Xinhua said on Wednesday. Wen was quoted by state media as saying on Sunday that the government would use all possible measures, including the yuan, to fight inflation - the first time that a top Chinese leader had publicly acknowledged that the yuan was one of the tools for combating inflation.
The central bank has allowed the yuan to rise 4.5 percent since it was depegged from the dollar in June 2010, and nearly 0.9 percent so far this year. Sustained capital inflows and large amounts of maturing bills and repos issued by the central bank in the past could fuel market liquidity in the second quarter, Wen said. "Imported inflationary pressures and inflation expectations are still strong," he said.
"Global commodity prices continue to climb due to ample global liquidity, a weaker US dollar and the Middle East turbulence as well as Japan's earthquake," Wen said. The economy is heading in the desired direction in response to the government's tightening measures, but inflation risks remain elevated, partly because of soaring global oil and commodity prices, Wen said. The government must make careful estimates of the lagging effect of monetary policies and expend more effort to avoid the negative impact of overlapping policy effects on the economy, he said.