China faces yuan pressure and hot money risk

China's yuan is facing a new round of appreciation pressure and expectations of a stronger currency will attract speculative capital inflows, complicating liquidity management, a senior official said yesterday.

Zhang Xiaoqiang, a Vice-Chairman of the National Development and Reform Commission (NDRC), the central planner, said quantitative easing in rich countries, a weakening dollar and China's economic recovery were set to create additional pressure on the yuan.

The comments were made at a meeting about foreign investment on December 11 but had not been reported.

Chinese Premier Wen Jiabao said in late December that the yuan was facing growing pressure to appreciate, but he insisted that Beijing would not give into foreign demands to let the yuan rise. China has kept the yuan virtually pegged to the dollar since the financial crisis worsened in mid-2008, and many analysts think it will hold the currency stable until it is confident that exports are on more solid footing.

Turning to China's investment priorities, Zhang said the country would continue to look spend money abroad to secure stable supplies of the raw materials its economy needs.

"Our demand for energy and resources will grow. A world economic recovery and a rebound in global demand for commodities may also push up international energy and resource prices further," Zhang said, according to the text of his speech.

"We must take part in global resource allocation in a more active manner," he added. Zhang also said China would pay more attention to "national economic security" in attracting foreign investment. Giving an example, he said that foreign takeover of Chinese agricultural product processing firms may potentially endanger the country's economic development and social stability.

"We must keep a firm grip on our core industries," he said. The NDRC's comments appeared aimed at limiting expansion by foreign companies, such as Singapore-based Wilmar International and Cargill Inc, in China's food processing industry.

Wilmar, which now owns China's largest soybean-crushing capacity and is also its top soyoil supplier, has been restricted from expanding in the soy-crushing industry. It is now focusing its expansion activities on rice and wheat milling.

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