China C. Bank Frets over Dollar Weakness Risk

Key currencies, including the dollar, could come under growing pressure because of extraordinary money-printing by central banks to counter the financial crisis, China's central bank said on Wednesday.

In its quarterly report on monetary policy, the People's Bank of China pledged an ample supply of credit to support the economy, which it said would enjoy "stable and quite fast" growth despite current weakness in external demand.

On the yuan, the 51-page report reaffirmed the central bank's long-standing commitment to keep the currency basically stable while enhancing exchange rate flexibility.

The PBOC said quantitative easing policies being pursued by the United States, Japan, Britain and Switzerland had increased the uncertainty surrounding key currency exchange rates.

"Although the dollar had appreciated against other key currencies, the Federal Reserve's announcement on March 18 of treasury bond purchases resulted in a fall in the dollar.

"As more and more economies start to implement extraordinary monetary policies like quantitative easing, risks of major currency depreciation may grow," the report said.

It said QE carried huge risks with potentially major repercussions for international financial markets and the global economy. Firstly, QE increased the risk of global inflation, the PBOC said.

"If central banks cannot mop up the huge liquidity when economic recovery comes through, asset bubbles and inflation may once again be triggered.

"Furthermore, inflation has become a global phenomenon in recent years, and a policy mistake at one major central bank could create inflation risks for the whole world," the PBOC said, without mentioning the Federal Reserve or other central banks by name.

Government policies to support the economy had begun to show results, but not enough of the burst of bank lending in the first quarter had been channeled to small and medium-sized enterprises, the PBOC said.

The ability of these firms to finance themselves had deteriorated as a result, the report said.

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