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China bank chief says revaluation of renminbi an 'initial adjustment'
Shanghai: The head of China's central bank has said that the modest revaluation of the renminbi announced last week was only an "initial" step, fuelling speculation that the authorities will strengthen the currency further over coming months.

In his first public comments since the revaluation, Zhou Xiaochuan, governor of the People's Bank of China, said: "We have made an initial adjustment of 2 per cent."

However, Zhou said the shift was unlikely to have much impact on the US trade deficit. "China's exchange rate reform will not have too much influence on US deficits," he said.

Under the new policy, announced on Thursday evening, China raised the level the renminbi trades against the US dollar by 2.1 per cent to Rmb8.11, and said the currency would now fluctuate against a basket of currencies.

By signalling the possibility of further strengthening of the renminbi, the Chinese authorities might hope to limit the political pressure they have been facing on the currency and stifle calls for greater protectionism in the US and Europe.

The risk is that the revaluation will see speculative funds pouring into the country, which could cause inflationary pressures and create asset price bubbles, especially in the property market.

China's foreign exchange reserves reached USD711bn in June, a 51 per cent increase on the year before, which economists said was partly the result of short-term capital inflows. Analysts say that the potential gains to speculators might be negligible, though, with the government showing that the changes in the valuation were going to be small and gradual.
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