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Shayne Heffernan reports on China

It pays to be aware of the fact that countries and regions are competitors for economic success, and in many cases that competition spills over into propaganda that reaches the main stream media. As traders and investors it is our duty to remain amoral, looking only at the hard core facts.

Although the West loves to report on Chinese failures, and attack their Government, the last weeks BIG STORY that China was going to put the brakes on on growth was in fact untrue. People’s Bank of China Deputy Governor Zhu Min signaled officials have no immediate plans to change their currency or monetary policies.

“We’ll continue with current accommodative fiscal and monetary policy,” said Zhu in Davos, Switzerland, where he is attending the annual meeting of the World Economic Forum. Asked about the exchange rate, he said a “stable” yuan has helped China during the financial crisis.

China has grown faster than economists anticipated in the fourth quarter, and yes the inflation rate accelerated to a 13- month high of 1.9 percent in December, but this is part of all economic expansion. While the rate of expansion is putting officials in a position to quantify policy or allowing the yuan to gain, such a measure is only to not see over heating and will not reduce China's growth rate.

Zhu said inflation expectations and overcapacity pose challenges for the government, which is continuing efforts to rebalance the economy toward domestic consumption and away from export-led growth. This is a process that “will take time,” he said. He did not say we are putting on the brakes.

China wants to ensure the “growth path is stable all the year along,” Zhu said.

The Chinese economy expanded a whopping 10.7 percent during the last quarter of 2009 from a year earlier, the fastest pace since 2007, buoyed by new loans. The International Monetary Fund forecasts China’s growth will accelerate this year to 10 percent from 8.7 percent in 2009.

George Soros and U.S. Representative Barney Frank were among Davos delegates that urged China this week to allow its currency to strengthen, although the US has not taken any such measures themselves. China has controlled the yuan since July 2008 after it strengthened 21 percent against the dollar over the previous three years. The US Government has maintained a low dollar policy since the greespan era.

Zhu said stability is important for China’s economy and that a “stable exchange rate” during a crisis “is good for China and good for world.” He argued any change would only play a “small part” in rebalancing the world economy although China is willing to work with other nations in withdrawing emergency stimulus.

“You change exchange rates, you don’t necessarily change the trade balance,” he said.

The government will need to rein in overcapacity in steel, cement, shipbuilding and other industries to account for a drop in exports to the U.S. and other traditional customers, the central banker said, adding that the government aims to keep economic growth between 8 percent and 9 percent this year.

Controlling inflation expectations will be “very important” in 2010 and money and loan growth is “very strong,” he said.

Chinese regulators began restricting specific new loans in areas they believe are over capasity after a surge in bank lending since Jan. 1 and an unprecedented credit growth of 9.59 trillion yuan ($1.4 trillion) in 2009 fanned false concerns of a property bubble.

Shayne Heffernan

Disclosure: Long China