China's slight hike of its US dollar and Hong Kong dollar deposit rates beginning May 20 will not influence the exchange rate of the yuan, said an official with the Shanghai-based trading center of the Bank of China (BOC) Friday.

The hike of overseas currency deposit rate might exert some indirect influence on the stabilization of exchange rate, said Le Yan, deputy manager of the BOC trading center in Shanghai.

Le said, in the past, Chinese with overseas currencies, choose to convert US dollars and Hong Kong dollars into RMB when making investments because the deposit rate was low in China.

With the increase of deposit rates, people will have more chances for overseas currency investment and the cost of RMB investment will rise, Le said.

The People's Bank of China, China's central bank, announced Thursday the increase of the interest rate of one-year US dollar deposits by 25 basis points to 1.125 percent. At the same time, the bank also announced to increase of the one-year Hong Kong dollar deposits by 18.75 basis points to one percent starting from May 20.

Tan Yaling, a renowned economist working for the Bank of China, said that the rate hike complies with the international trend. The US Federal Reserve raised the deposit interest rate of US dollar eight times since the latter half of 2004.

"The move will push forward China's interest rate liberalization," said Tan.

Dr. Wang Zhao, with the Development and Research Center of the State Council, said the central bank faces a dilemma when raising the deposit rate for these two overseas currencies.

Compared to the United States, the deposit rate of US dollar in China has remained low, said Wang. This has led to increasing underground foreign currency trading in China. The central bank is obligated to increase the deposit interest rate to stem this kind of activity.

However, a higher deposit interest rate is not conducive to alleviating the pressure brought by the possible yuan appreciation, he said.

"That is why the central bank made the compromise," he said. " It just made a slight increase in the deposit rate."

Source: Xinhua