China will intensify reforms of its currency regime and allow the yuan to float more freely, Premier Wen Jiabao said on Wednesday at the end of an annual parliament session punctuated by signs of a slowing economy.
In the Hong Kong market, NDFs (non-deliverable forwards) have started to fluctuate both ways. This tells us the yuan is possibly near a balanced level, Wen told a news conference on the last day of the 2012 National People's Congress meeting.
We will step-up exchange rate reforms, especially in increasing two-way fluctuations, the 69-year-old Wen said at his last annual post-parliament news conference.
Wen retires next year along with President Hu Jintao, and recent data suggest the economic headwinds they face at home and abroad in their final year in power will complicate the ruling Communist Party's focus on maintaining stability.
At the opening of the meeting last week, Wen cut China's annual economic growth target to an eight-year low of 7.5 percent, in part to create some leeway to rebalance the economy and defuse price pressures in the run up to the leadership transition that begins later this year.
Lower growth will allow Beijing to reform key price controls without causing an inflation spike, so monetary policy can stay broadly expansionary to ensure a steady flow of credit to the small and medium-sized firms the government wants to encourage.
Inflation hit a three-year high of 6.5 percent in July and was above the government's 4 percent target in every month of 2011. Wen has maintained the target for this year and consumer prices are up an average of 3.9 percent on year-ago levels in the first two months of 2012.
The growth and inflation trade-off is particularly pointed as most of China's 1.3 billion people are poor, its 800 million workers are mainly low paid and an estimated 10 percent of the population live on less than $1 per day. They feel the pinch of rising prices, especially for food, acutely.
TRADE, ECONOMY SLOWING
Meanwhile foreign demand for goods from China's vast factory sector has suffered as its two biggest markets, the European Union and the United States, struggle to overcome, respectively, a festering debt crisis and sluggish consumer spending.
Data released at the weekend showed that China's trade balance plunged $31.5 billion into the red in February, the largest deficit in at least a decade.
About 200 million jobs in China are directly dependent upon overseas demand or foreign-funded investments.
The trade data followed reports on Friday that inflation eased in February while bank lending, retail sales and industrial output growth all cooled more than expected, pointing to slowing of the world's second-biggest economy.
Economists widely expect 2012 to deliver the slowest full year of growth in the decade that Wen and Hu have been in power.
China's party-run parliament is a regimented show of unity for acclaiming policies, rather than debating them. Officials poll the media for questions ahead of time in an effort to ensure there are no surprises when the Premier gives his news conference.
(Writing by Nick Edwards; Editing by Kim Coghill)