China central bank chief seeks to reassure on yuan, growth

[SHANGHAI] There is no reason for China's yuan currency to keep falling and Beijing has more room to boost the world's second-largest economy, the governor of its central bank said Friday as he sought to reassure markets.

The comments by Zhou Xiaochuan, head of the People's Bank of China (PBoC), in Shanghai came ahead of a meeting of finance ministers from the world's top 20 economies in the city, China's commercial hub.

"There is no basis for persistent renminbi depreci0ation from the perspective of fundamentals," Zhou said, using another name for the currency.

"Short-term market volatility will give way to economic fundamentals. The market is sometimes more influenced by short-term factors." China's economy grew 6.9 per cent last year, the slowest rate since 1990, and its weakening has been a driver of slumping commodity prices and one of the factors behind global stock market turmoil this year.

But Zhou told a conference organised by the Institute of International Finance: "The fundamentals of China's economy remain strong."

Beijing has taken a series of steps to try to boost growth, with six interest rate cuts since November 2014 and multiple reductions in the amount banks must keep in reserve, along with targeted spending increases.

"China still has some monetary policy space and monetary policy tools to address potential downside risk," Zhou said in a possible signal of more such moves, adding that fiscal and structural steps should also be used.

The bank said separately that its monetary policy stance was "prudent and slightly easing".

Many analysts have been expecting Beijing to take more measures to boost the economy.

"The reserve requirement ratio is quite high," Liu Ligang, China chief economist at ANZ Research, told AFP. "And the interest rate gap compared with other countries is quite big, so the space for monetary policy steps for China is very very big." The PBoC injected 300 billion yuan (US$46 billion) into the financial system on Friday as part of its regular operations to boost liquidity.

Shanghai stocks closed higher after Zhou's comments, with the benchmark Shanghai Composite Index rising 0.95 per cent, having plummeted more than six per cent on Thursday.

China's Communist authorities keep a tight rein on the yuan, only allowing it to rise or fall by two per cent on either side of a daily fix set by the central bank.

In January, Beijing guided the unit down 1.4 per cent by setting the rate lower for eight consecutive sessions - a move that raised worries of a creeping devaluation.

China adjusted the yuan down nearly five per cent over a week in mid-August, spurring fears it was pursuing a currency war to help boost its flagging overseas sales.

The yuan-dollar exchange rate has been a point of friction with Washington in the past, and US Treasury Secretary Jacob Lew expressed hopes the G20 meeting would agree to avoid competitive devaluations.

"That's competing in a beggar thy neighbour way, sharing a pie that's either frozen or shrinking, and it doesn't lead anywhere good," he told reporters in Shanghai.

Beijing set the central rate fractionally weaker on Friday, at 6.5338 yuan to the dollar, data from the China Foreign Exchange Trading System showed.

But Zhou insisted at a PBoC briefing: "We will not resort to competitive devaluations to boost our advantage in exports." Zhou's comments on the currency could not completely soothe the market, said Liao Qun, chief economist at Citic Bank International in Hong Kong, but his repeated emphasis would help to give the market some relief.

Capital has been flowing out of China due to worries about its flagging growth, causing the currency to weaken - which in turn drives withdrawals.

The country's foreign exchange reserves have fallen to US$3.2 trillion, their lowest level in more than three years, the central bank said this month, as Beijing sells dollars to stop the yuan from depreciating further.

In its statement Friday, the PBoC said China's foreign exchange reserves, the world's largest, will be "kept around an appropriate and reasonable level".

"The decline of reserves during the adjustment process is normal and consistent with the ongoing economic restructuring and a more balanced growth model," it said.

Beijing is looking to move its economic model away from one driven by investment and exports to consumer demand, which it hopes will produce more sustainable albeit slower growth, but the transition is proving bumpy.

AFP