Tuesday March 13, 2012
China central bank sees room for policy manoeuvring
BEIJING: China has ample room to tweak policy to support credit growth in the face of volatile foreign capital flows that will inevitably see market forces play a greater role in determining the value of the yuan currency, the central bank said.
Speaking days after China posted its biggest trade deficit in at least a decade, People's Bank of China (PBOC) governor Zhou Xiaochuan signalled that Beijing had plenty of scope to relax monetary policy to juice up the cooling economy.
His remarks support well-entrenched bets among investors that China will further reduce the amount of cash its commercial banks must hold as reserves with the central bank, to free up more money for lending.
“There is a pretty big room for RRR cuts,” Zhou said at an annual press conference, referring to bank's reserve requirement ratio.
“The RRR is just over 20% now. We had a low RRR of 6% in the late 1990s, even lower than that in some countries.”
But Zhou said future RRR moves would depend on the overall liquidity in financial markets, as determined by China's balance of payments and total foreign currency purchases by the central bank and Chinese commercial banks.
“The biggest uncertainty in the international economy is, as we all know, the recovery, and especially with regard to Europe's economy and the euro sovereign debt crisis,” Zhou said.
Zhou did not comment on speculation that China is ready to widen the yuan's trading band to give the currency more flexibility, even as Beijing pushed the yuan sharply lower yesterday.
It has set a weaker trading midpoint for the currency in five of the last six trading sessions, fuelling some speculation in financial markets that Beijing may rely more on foreign exchange policy to stimulate exports and broader growth.
Yi Gang, deputy governor at the central bank and who oversees the management of China's US$3.2 trillion foreign exchange reserves, said China's trade performance last month was evidence that the yuan was close to a “balanced level”.
The yuan's value has been a lightning rod for disputes between China and its biggest trade partners including the United States, who accuse Beijing of deliberately holding down the currency for trade advantage.
China has always denied those allegations, and increasingly says it is allowing market forces to have a bigger sway over the yuan as it nears its fair value, an argument reiterated by Zhou.
“The closer the yuan is to a balanced level, the bigger role market forces will play in the exchange rate,” he said.
“We will allow and encourage market forces to play a bigger role, and the central bank will reduce its intervention in the market in an orderly manner,” Zhou said, but declined to comment on whether the yuan may soon stop rising.
“Whether the yuan's appreciation is over, I think that is mainly up to market demand and supply. It won't be that simple.”
Data over the weekend showed China's trade balance plunged US$31.5bil into the red in February as imports swamped exports. It followed reports on Friday that inflation cooled in February while retail sales and industrial output fell below forecast, all pointing to a gradual cooling.
The trade data “means a bigger need to stimulate domestic demand via fiscal stimulus and monetary easing,” said Dariusz Kowalczyk, senior economist and strategist for Asia ex-Japan at Credit Agricole CIB, in a note.
“So we expect 200 bps (basis points) more in RRR cuts and 50 bps in interest rate cuts later this year.”
The central bank had cut the RRR by 50 basis points each in November and February to foster economic growth and ease credit strains arising from tight monetary conditions, a shrinking trade surplus and slower hot money inflows. - Reuters