China is facing increasing pressure to allow its currency to appreciate faster because of the combination of falling US interest rates and the rising cost of money at home, according to a senior central bank official.
Speaking at a forum in Beijing at the weekend, Yi Gang, an assistant governor of the People's Bank of China, contrasted China's five rate rises this year, to fight inflation, with the downward pressure on US rates in the wake of the subprime crisis.
"With the simultaneous influence of the Fed's rate cuts and China's rate hikes, the pressure for the renminbi to appreciate is further rising," said Mr Yi, according to the China Securities Journal.
The slow pace of the currency's appreciation is the target of complaints from the US and Europe, whose politicians say it distorts China's economy and subsidises exports.
The renminbi has risen by only about 10 per cent against the dollar since China broke its currency's peg with the greenback in July 2005. Over the same period it has fallen against the euro and barely moved on a trade-weighted basis.
China has been able to resist pressure for appreciation by buying the dollars coming into the country with renminbi, and then draining the local funds out of the system by selling central bank bills, a process known as sterilisation. But the convergence of US and Chinese interest rates threatens to turn that into a loss-making activity.
