Chinese central bank Governor Zhou Xiaochuan said the nation will maintain market stability and adjust policies at the right time, his first comments since a record cash squeeze hit the world’s second-largest economy.
China’s growth slowdown remains in a “reasonable” range and the economy is stable, Zhou, head of the People’s Bank of China, said today in a speech at the annual Lujiazui Forum financial conference in Shanghai. The nation will continue to implement a prudent monetary policy, which has shown to be appropriate with good results, Zhou said.
Zhou is trying to soothe concerns that the credit crunch will harm growth, saying today that he’s fully confident in the nation’s economic prospects and financial system. He reiterated points in the central bank’s June 25 statement that it will use tools to safeguard stability in money markets, after the overnight repurchase rate surged to a record high last week.
The PBOC “will use all kinds of tools to appropriately adjust liquidity in the market and maintain the overall stability of the market,” Zhou said in his first public remarks since the liquidity squeeze that sent money-market rates to the highest in at least 10 years.
The central bank will “create good monetary conditions for stable operation of financial markets and economic development,” Zhou said. Markets are “very sensitive” and will have a “fast response to any signals,” he said.
He made the points on the economy and markets at the end of a 30-minute speech devoted mostly to discussing how Shanghai can develop into a global financial center.
The Shanghai Composite Index (SHCOMP) rose 0.8 percent at the 11:30 a.m. local-time break, headed for the first increase since June 18. The overnight repurchase rate fell for a sixth day, dropping 49 basis points, or 0.49 percentage points, to 4.96 percent.
“Zhou just reinforced the message that China would use all tools to ensure that the interbank market won’t seize up,” said Tim Condon, head of Asian research at ING Groep NV in Singapore. A lack of additional comment on the liquidity squeeze may be “designed to keep the threat in place that banks cannot be confident that there will be uninterrupted abundant liquidity in the interbank market,” said Condon, who formerly worked at the World Bank.
The credit crunch, aimed at wringing speculative lending out of the banking system, has increased chances that the government will miss its annual target for economic growth this year, according to Goldman Sachs Group Inc.
Goldman Sachs, China International Capital Corp. Barclays Plc and HSBC Holdings Plc this month pared their growth projections for this year to 7.4 percent, below the government’s 7.5 percent goal set at a March conference where Li Keqiang became premier.
“China’s economy is still an important driving force for global growth,” Zhou said. “We have full confidence in China’s economic development in the future. We have full confidence in China’s financial industry and financial markets.”
Bank of America Corp. said in a report today that the worst is over for China’s credit crunch and interbank lending rates are likely to “gradually moderate in the next couple of weeks.”
“A seasonal decline in liquidity demand in early July will also facilitate this process,” Lu Ting, head of Greater China economics in Hong Kong, said in the report.
Today’s remarks were Zhou’s most extensive on the economy since April, when he said the nation needs to “sacrifice short-term growth” to make reforms. Zhou, 65, was reappointed as governor in March, adding to a record decade in office.
China will expand cross-border use of the yuan and encourage multinational companies to include the currency in their asset portfolios, Zhou said. The country will allow direct trading between the yuan and additional currencies and push forward convertibility in the capital account without giving up control of capital flows, he said.
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