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HIGHLIGHTS-China central bank news conference on policy, yuan

Published: March 12, 2012 | 9:16 am
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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, central bank chief Zhou Xiaochuan said on Monday.

Following are highlights from the People’s Bank of China’s news conference on the sidelines of the annual parliament meeting. Vice governors Hu Xiaolian, Liu Shiyu and Yi Gang, who heads the State Administration of Foreign Exchange (SAFE), also took questions.

The PBOC issued a statement on key policy goals for 2012.

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“The PBOC will continue to implement a prudent monetary policy, maintain policy consistency and stability, make macroeconomic policies better targeted, more flexible and pre-emptive, strike a balance between maintaining sustainable and relatively fast growth, adjusting economic structures and managing inflationary expectations.”

“The PBOC will, in light of economic and financial situations, adopt a mix of policy instruments including interest rates, exchange rate, open market operations and reserve requirement ratio, properly use the macro-prudential policy framework, and balance money supply and demand, in order to maintain reasonable growth of the all-system financing aggregate.”


“Now banks’ reserve requirement ratio is just over 20 percent. We had low RRR, which was at 6 percent in the late 1990s.”

“There is a lot of room for RRR cuts. But we need to look at whether it’s necessary… and look at market liquidity. We cannot raise or cut RRR at will when we think there is room. We need to look at the liquidity condition, which is related to FX purchases and our international balance of payments.”

“The PBOC has always paid attention to price tools. It raised the benchmark interest rate five times from the fourth quarter of 2010 to the third quarter 2011. But when we use the tool, we need to consider some constrains. One consideration is the impact on capital flows.”


“Interest rate reforms have been proceeding in an orderly manner. We will continue to push forward the process of interest rate reforms during the 12th five-year plan (2011-15).”

“But we have to consider some conditions. The main condition is corporate governance and financial restraints of financial institutions. That will ensure a fair market competition environment once interest rates are liberalised. Also, we must protect depositors as there may be failures once interest rates are freed up.”

YUAN LEVEL (Zhou Xiaochuan)

“The closer the yuan is to an equilibrium, the bigger role market forces will play in the yuan exchange rate. We will allow and encourage market forces to play a bigger role, and the central bank’s participation and intervention in the market will decrease in an orderly manner.”

“The yuan exchange rate movement is not against any single currency, it floats against the dollar, but also the euro and yen. Therefore, if other major currencies are strengthening or weakening, then the yuan exchange rate floating mechanism will be more flexible to cope with changes in other currencies.”

“Of course, the yuan exchange rate movement is not solely decided by international markets, it is also largely up to our international payment conditions as well as demand and supply of forex market participants.

“But whether it is okay to say that the yuan appreciation process is over? I think it’s mainly up to market demand and supply, and it won’t be that simple.”

“Whether there will be a clear line, like in one day the process is over, I don’t think the issue will be that simple.”


“We should treat funding shortages of projects under the government’s 4 trillion yuan stimulus package differently. According the National Development and Reform Commission, there should be sufficient funding for key projects. Of course, there are some projects that may face capital shortages.”

“If we guarantee funding for all the projects, the monetary policy’s goal of stabilising prices will not be reached. I’m not surprised to see some projects are facing capital shortfalls.”

“It’s a bit of an exaggeration to say banks are making ‘huge profits’. The banking system still faces the problem of capital shortages this year. Bank profits have indeed outperformed other industries, but we need to see that there are many factors behind such profits — one of them is the cyclical factor.”


“The biggest uncertainty in the international economic situation, as we all know, is the economic recovery process, especially the European economy and financial market development relating to the euro sovereign debt crisis.”


“Steady progress will be made to promote capital account convertibility. Continued efforts will be made to manage China’s reserve assets with new innovations.”

“The PBOC will steadily advance the market-based interest rate and the yuan exchange rate regime reforms. It will also expand the product variety and coverage of cross-border yuan businesses in a steady manner to meet market demand. Efforts will be made to improve yuan settlement business for cross-border trade and investment transactions.


“In general, we support the measures of the EU, ECB and IMF in solving the euro debt problem, and China has made its own great efforts as well.

“As you may know, China always sticks to diversification in terms of currency and asset portfolio and that principle has not changed since the euro debt crisis. We have continued our investments in Europe and European markets.”

“We don’t put all eggs in one basket”.

“Our portfolio in euro zone and Europe has achieved the goal of maintaining the value and increasing the value. In other words, the returns are higher than local (inflation rates).”

“We are still confident in Europe in the future and China is a long-term and responsible investor in managing its foreign exchange reserves. In the future, we will always be an investor in Europe and European markets.”

Separately, Yi said it made sense for China and Japan to work closely together on financial market matters.

“China and Japan are the No.2 and No.3 economies in the world, and we are neighbours as well, so it’s very important for financial cooperation between the two countries, especially over the development of bond markets.”

“We welcome Japan to invest in the Chinese bond markets and we will also make investments in the Japanese government bond (JGB) market or other fixed-income products.”

“For a period of time when the Japanese side is very worried about excessive investments and yen appreciation, then we can buy fewer (Japanese government bonds). But if both sides think the times are okay… then we can buy more.”


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