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PBOC’s Zhou sees relatively stable yuan even as US Fed hikes loom

A man uses his mobile phone while walking past the headquarters of the PBOC in Beijing, November 20, 2013. PBOC Governor Zhou Xiaochuan said the yuan’s rate should be relatively stable this year even as rising US interest rates contribute to foreign exchange volatility. — Reuters picA man uses his mobile phone while walking past the headquarters of the PBOC in Beijing, November 20, 2013. PBOC Governor Zhou Xiaochuan said the yuan’s rate should be relatively stable this year even as rising US interest rates contribute to foreign exchange volatility. — Reuters picBEIJING, March 10 — People’s Bank of China Governor Zhou Xiaochuan said the yuan’s rate should be relatively stable this year even as rising US interest rates contribute to foreign exchange volatility.

Interest rate differentials won’t lead to persistent speculation, and rates will be mainly based on the domestic economy, Zhou said Friday at a rare press conference during the annual National People’s Congress sessions in Beijing. He said China has many monetary policy tools, policy will be prudent and neutral, the drop in foreign reserves is “not bad,” and suggested attacking the nation’s soaring debt load may be more of a longer-term goal.

“As the Chinese economy stabilises and becomes healthier, and the nation makes achievements in the supply-side reforms, and global investors become more confident in China’s economy, the yuan’s exchange rate will naturally be on a trend to stabilise,” Zhou said. “At the same time, we don’t have major changes to our related policies but we will be more precise when implementing and regulating the market. Therefore, under such circumstances, the yuan’s exchange rate will be relatively stable.”

With growth steadying, the central bank is seen moving toward a tightening bias by boosting money-market rates to contain company leverage. With the Federal Reserve lining up rate hikes this year starting most likely this month, keeping policy more in step with the US could help support the yuan and reduce capital outflow pressure.

“The interest rate differential can always motivate traders to make some short-term transactions, and money will move toward the place with higher interest rates,” Zhou said. “But in the medium term, every country’s interest rate is determined by its domestic economic conditions, such as its economic growth, employment, people’s confidence in the economy and inflation.”

The central bank will likely interfere less in the currency market this year and allow the yuan to fluctuate more freely, Zhao Yang, chief China economist at Nomura Holdings Inc. in Hong Kong, said after Zhou’s briefing.

“The yuan will continue to face downward pressure and the central bank will continue to manage the market’s expectations,” Zhao said. “The PBOC will keep liquidity relatively ample this year and benchmark rates near current levels.”

The PBOC faces conflicting goals as deflating asset bubbles and reining in debt require it to manage credit growth without tightening policy so much it chokes the expansion. Premier Li Keqiang this week announced a 2017 growth target of “around 6.5 per cent, or higher if possible” even as the leadership may only be targeting modest curbs on credit.

Taming rapidly rising debt, which Bloomberg Intelligence estimates rose to 258 per cent of economic output last year, will be a relatively medium-term process, and there won’t be clear effects in the short term because the outstanding amount is significant, Zhou said. PBOC Deputy Governor Yi Gang, flanking Zhou, said that while continually rising leverage will hurt the economy, policy makers must first stabilise it then slow the rise each year.

“Clearly this is can kicking,” said Michael Every, head of financial markets research at Rabobank Group in Hong Kong. “The promised deleveraging is now medium term, not now.”

Zhou reiterated that policy makers will seek prudent and neutral monetary policy and said that doing so will help push forward supply-side reforms. He said the central bank has many tools to choose for policy and that those instruments will lead market expectations.

“Many firms need to reduce excess capacity, and if liquidity is too loose, there will be a lack of pressure,” Zhou said. “Some companies with excessive capacity take up too much financial resources, and the financial sector should facilitate the reduction of overcapacity.”

PBOC transition

China’s central bank is halfway through a transition from a system based on the quantity of money to one centred around the price of money. The PBOC is using both benchmark interest rates and newer tools such as the seven-day reverse repurchase rate to adjust policy. Analysts said the central bank needs to clearly announce its new framework, according to a Bloomberg survey of economists last month.

“The central bank has a lot of tools in its kit, and those tools may function to lead market prices and expectations as well as convey the purposes of monetary policies,” Zhou said. “Still, it’s not necessary to over-interpret the quantity or price of each operation. Overall the monetary policy is prudent and neutral.”

Breaks silence

Zhou, 69, appeared relaxed and confident, smiling through his first public appearance since the middle of last year and jumping from topic to topic for more than an hour. Zhou has led the PBOC for almost a decade and a half, helping steer the nation through the global financial crisis, overhaul monetary policy tools and oversee the yuan’s elevation to reserve-currency status.

Zhou also addressed China’s foreign reserves, which remain the world’s largest stockpile even after falling by about a quarter from a US$4 trillion peak in 2014. The hoard grew “a bit too fast” since 2002 and it’s unnecessary to keep so much, Zhou said, adding that decline is “not bad” and people have overreacted to the decrease.

Reserves slipped below US$3 trillion (RM13.3 trillion) for the first time in six years in January before climbing back above that threshold last month amid tighter capital controls. Yi added that reserves have helped keep the yuan exchange rate stable.

Li’s report Sunday said the exchange rate “will be further liberalised, and the currency’s stable position in the global monetary system will be maintained.” That’s a change from last year’s language saying the market-based mechanism for setting the exchange rate will be improved “to ensure it remains generally stable at an appropriate and balanced level.”

China will steadily open its bond market by encouraging overseas institutions to issue onshore and to invest in the domestic market, PBOC Deputy Governor Pan Gongsheng said at the briefing.

“The PBOC will definitely improve arrangements of related regulations, such as law, accounting, auditing, tax and credit rating, and create a more convenient and friendly environment for overseas investors to invest in onshore bonds,” Pan said. “We’ll need to communicate more with overseas investors in this process. I don’t think this is urgent. We’ll do it step by step, and walk in a steady manner.” — Bloomberg

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