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Feb. 15 (Bloomberg) -- Goldman Sachs Group Inc. Chief Economist Jim O’Neill said China may be poised to let its currency strengthen as much as 5 percent to slow the world’s
fastest growing major economy.

“I have a strong opinion that they’re close to moving the exchange rate,” O’Neill said in a telephone interview from London after China’s central bank told lenders on Feb. 12 to set
aside larger reserves. “Something’s brewing. It could happen
anytime.”

Chinese policy makers are seeking to restrain credit growth after their economy grew the fastest since 2007 in the fourth quarter. Banks extended 19 percent of this year’s 7.5 trillion
yuan ($1.1 trillion) lending target in January as property
prices climbed the most in 21 months.

Officials in Beijing have resisted allowing gains in the yuan, having controlled its value since July 2008 after it strengthened 21 percent against the dollar in the previous three
years. The status quo has drawn criticism from foreign policy
makers who say keeping the currency undervalued has handed
China’s exporters an advantage and inflated asset bubbles.

O’Neill, who coined the term “BRICs” in 2001, anticipating the boom in the emerging economies of Brazil, Russia, India and China, said China may allow the yuan to rise
as much as 5 percent in a one-off revaluation and to then trade
within a bigger band or against a larger basket of currencies.
That would help counter international pressure, he said.

‘Sooner the Better’

“They need to do something to slow the economy down and deal with the inflation consequences,” said O’Neill, who forecasts the Chinese economy is currently growing between 12
percent and 14 percent and will expand 11.4 percent over the
year. “The more they do -- and the sooner -- the better.”

The World Bank predicts China’s economy will grow 9 percent in 2010, faster than global growth of 2.7 percent. The government said last month the 2009 expansion was 8.7 percent.

China’s yuan recorded its biggest weekly decline in more than a year last week on speculation importers bought dollars before this week’s Chinese New Year holidays. Vice Commerce
Minister Zhong Shan said on Feb. 8 the government may allow the
yuan to move in a “small range,” while stressing the official
stance is to maintain stability in the currency.

The yuan depreciated 0.09 percent last week to 6.8330 per dollar, the biggest loss since the five days ended Jan. 9, 2009. The reserve requirement will rise 50 basis points, or 0.5
percentage point, effective Feb. 25, the People’s Bank of China
said. The current level is 16 percent for the biggest banks and
14 percent for smaller ones.

Record Lending

Record lending last year and a 4 trillion yuan stimulus package helped China lead the recovery from the deepest global recession since World War II. Investors’ concern about
investment bubbles in China, and what action the government may
take to prevent or deflate them, has mounted this year.

“It will take a multi-faceted approach to slow the economy,” Stephen Jen, London-based managing director at BlueGold Capital Management LLP., said in a Feb. 12 interview in
which he predicted the yuan will be allowed to gain in the first
half of this year.

U.S. President Barack Obama said in a Feb. 9 interview with Bloomberg BusinessWeek that a stronger currency would help China to deal with “a bunch of bubbles” in its “potentially
overheating” economy.