China has 'tremendous' room to adjust policies if trade war worsens: PBOC chief

Beijing

CHINA has "tremendous" room to adjust monetary policy if the trade war with the US deepens, People's Bank of China Governor Yi Gang said.

"We have plenty of room in interest rates, we have plenty of room in required reserve ratio rate, and also for the fiscal, monetary policy toolkit, I think the room for adjustment is tremendous," said Mr Yi in an exclusive interview in Beijing.

Asked if his scheduled bilateral meeting with US Treasury Secretary Steven Mnuchin this weekend would get negotiations with the US back on track, Mr Yi said it would probably be a "productive talk, as always," though the topic of the trade war would be "uncertain and difficult". The two will meet on the sidelines of the Group of 20 gathering of finance ministers and central bank governors in Japan.

That meeting takes place as the two nations escalate their trade war amid a darkening outlook for the global economy, with Citigroup Inc and Morgan Stanley warning this week that it risks tipping the world into recession.

Yuan troubles

This is the first publicly announced meeting since the trade talks fell apart last month and could pave the way for a meeting between Presidents Donald Trump and Xi Jinping, who will likely be in Japan at the end of the month for the G-20 leaders' summit.

Mr Mnuchin, along with US Trade Representative Robert Lighthizer, has led the US-China talks while Mr Yi has been a member of China's delegations.

The offshore yuan tumbled as much as 0.5 per cent, the most since May 13, before paring its loss slightly to trade at 6.9598 per dollar in Hong Kong. That's the weakest level since November.

The yuan has stabilised in recent weeks as authorities voiced support for the currency, following a rapid sell-off that pushed it near 7 per dollar - a level not breached since the global financial crisis. It still lost about 2.5 per cent in May, among the worst in Asia.

"Recently, it's a little bit weaker, because of tremendous pressure from the US side," Mr Yi said. Asked if there's a red line for the exchange rate, Mr Yi said no number is more important than another.

"The trade war would have a temporary depreciation pressure on renminbi, but you see, after the noise, renminbi will continue to be very stable and relatively strong compared to emerging market currencies, even compared to convertible currencies," Mr Yi said, using the yuan's official name. "I'm very confident renminbi will continue to be stable at a more or less equilibrium level."

"A little bit of flexibility of renminbi is good for the Chinese economy and for the global economy because it provides an automatic stabiliser for the economy," he said. "The central bank of China is pretty much not intervening in the foreign-exchange market for a long time, and I hope that this situation will continue, not intervening."

Commenting at the end of a week in which the Federal Reserve and European Central Bank sounded more open to easing monetary policy and with Australia and India already cutting rates, Mr Yi said China's monetary policy has "to be in a sober mind position", and the policy stance is prudent.

"I think our benchmark interest rate right now is on a right level. I would say, in terms of resources allocation at this level, I call it very close to a 'golden level'," he said.

Still, more economists are predicting that a worsening trade war and job market outlook could prompt the central bank to take bolder easing steps.

"Looking forward, our base case is that an escalating trade war will push key gauges below the PBOC's tolerance threshold, triggering 50 basis points (bps) of rate cuts and another 150-200 bps of reserve requirement cuts by year-end," David Qu, an economist with Bloomberg Economics in Hong Kong, wrote in a recent report.

Mr Yi gave no indication that the government was considering more fiscal stimulus now to counteract the effect of the trade war.

"Our fiscal policy this year is probably the largest and strongest fiscal reform package, in terms of the tax cuts, and also in terms of having more efficient fiscal resources allocation between the central government and the local government," Mr Yi said.

"The current package is able to cover the cases where the situation is getting a little bit worse, but of course, if the situation gets tremendously worse, they will open the discussion. But right now they haven't discussed that scenario yet."

Trade war effect on jobs

The government is concerned about the effect on employment from any worsening in the dispute with the US with Mr Yi suggesting there could be support such as a 100 billion yuan (S$19.7 billion) for short-term vocational training programmes for those who have lost jobs.

"The PBOC may reduce benchmark interest rates, if the full-year growth of China's gross domestic product threatens to fall below 6.2 per cent and if the US imposes tariffs on remaining Chinese exports," said Christy Tan, head of markets strategy at National Australia Bank.

Risks of the yuan "breaking 7" have elevated along with the escalation of the trade war and the prospect that tension will be prolonged, she said, adding the trigger for such a move could be a lack of progress on negotiations during the G-20 summit.

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