BEIJING -- China's central bank served notice on Thursday that it would keep tightening monetary policy to mop up excess liquidity and prevent the world's fourth-largest economy from overheating.
But the People's Bank of China gave no indication that Beijing would tackle the country's big economic imbalances by heeding a growing clamour from Washington for a faster rise in the yuan .
In its monetary policy report for the first quarter, the central bank reaffirmed China's long-standing policy of keeping the currency basically steady at a reasonable level.
Going further, it said that greater consumption, rather than a more active currency policy, was the key to reducing China's big external payments surplus.
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China's current account surplus, the broadest measure of trade in goods and services, jumped 55.4 percent in 2006 to $249.9 billion, the State Administration of Foreign Exchange said in a separate report.
"China needs to prevent the economy from shifting from a state of overly rapid growth to one of overheating and to avoid big ups and downs," the central bank said on its Web site (www.pbc.gov.cn).
China chalked up gross domestic product growth in the first quarter of 11.1 percent compared with a year earlier, driven by a doubling of the trade surplus, high investment rates and an acceleration in consumption.
"Generally speaking, the economy has continued to grow in a rapid and stable way, but we need to pay attention to some acute problems in the economy," it said.
These problems included a further pick-up in already over-rapid growth and a potential rebound in fixed-asset investment, as well as a still-growing trade surplus, excessive liquidity and the risk of inflation, the report said.
The central bank has increased interest rates three times in the past year, and banks' reserve requirements seven times, to tackle these imbalances and the report said it would continue to use open market operations and higher bank reserve requirements.
The PBOC sold more than 100 billion yuan in three-year central bank paper to commercial banks on Thursday in the latest attempt to absorb the flood of cash pouring in from China's current account surplus.
China has accumulated $1.2 trillion in foreign currency reserves through the central bank's intervention to hold down the value of the yuan. Bankers say two-thirds of the money is invested in safe but relatively low-yielding dollar bonds.
NO HARM TO DOLLAR
The central bank said it would improve the way it manages its reserves stockpile, the world's largest, but in a way that would not harm dollar assets.
China would "not sell large amounts of U.S. dollar assets", it said.
Beijing is setting up an investment agency to manage part of the reserves more actively. Central bank governor Zhou Xiaochuan said recently the new entity would be up and running soon.
Analysts have long feared that abrupt or substantial changes in China's investment portfolio could undermine the U.S. currency and rock world markets.
But the PBOC said its main aim in diversification was to address the flow of new reserves, not the stock of existing reserves.
"Broadening the way in which we use our foreign exchange reserves will not have an impact on U.S. dollar assets," it said.
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