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Financial Challenge for China:
Currency at High vs. Dollar

Dec. 29, 2006 (EIRNS)—Due to China's huge trade surplus against the United States, the Chinese currency, the renminbi (RMB), was at a record high of 7.808 against the U.S. dollar today. This was the seventh record high of the RMB this month. The value of the RMB against the dollar is up almost 3.86% since China revalued the RMB in July 2005.

As of November, China's trade surplus was $156.521 billion, up 42% over last year. The People's Bank of China has had to issue more RMB to buy excess foreign exchange. The Xinhua news agency reported that the huge influx of foreign exchange is responsible for about one-third of China's money supply.

China's banks are also facing internal problems. RMB savings deposits exceeded loans by 11 trillion yuan ($1.41 trillion) in November, with the loan/savings ratio at a record low of 66.74%, according to the People's Bank of China. This is up from a margin of 9 trillion RMB in January. With savings increasing rapidly, banks are finding it difficult to lend effectively. The Chinese goverment has established a policy of restricting investment in local construction or other projects, in order to attempt to prevent real estate or other bubbles. However, the banks are now under pressure to pay interest on the savings deposits, and the huge gap between loans and deposits could pressure the commercial banks again loosen credit. There is also the potential that these funds would flow into the stock or securities markets, making the problem of excess liquidity worse.

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