China's Central Bank Says No Basis for Continued Yuan Decline

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No Basis for Lasting Yuan Fall: PBOC's Zhou
  • No need for concern about short-term drop in foreign reserves
  • Zhou dismisses speculation China will tighten capital controls

China’s central bank governor said there’s no basis for continued depreciation of the yuan because the balance of payments is good, capital outflows are normal and the exchange rate is basically stable against a basket of currencies, according to an interview published Saturday in Caixin magazine.

Zhou Xiaochuan dismissed speculation that China plans to tighten capital controls and said there’s no need to worry about a short-term decline in foreign-exchange reserves, adding that the country has ample holdings for payments and to defend stability.

The comments come as Chinese financial markets prepare to reopen Monday after the week-long Lunar New Year holiday. The country’s foreign-exchange reserves shrank in January to their lowest level since 2012, signaling that the central bank sold dollars to prop up the yuan as it fell to a five-year low. The weakening exchange rate and declining share markets in China have fueled global turmoil and helped send world stocks to their lowest level in more than two years.

"Zhou’s remarks are timely, filling a void in the market’s understanding of China’s strategy on the exchange rate at a critical moment," said Tom Orlik, Bloomberg Intelligence’s Chief Asia Economist. "Zhou appears to signal that a shift to a more flexible exchange rate may go on hold through the current period of market stress."

China is committed to making progress with exchange-rate reform during its 13th Five-Year Plan, relying more on the market to determine prices, Zhou said in the interview.

Combating Speculation

The draw-down of China’s reserves has continued since the devaluation of the currency in August, with holdings falling by $99.5 billion in January to $3.23 trillion, the central bank said Feb. 7. The stockpile slumped by more than a half-trillion dollars in 2015.

"Zhou has effectively ruled out any devaluation," said Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong. "If they do, it’s effectively acceding to speculators who want the yuan to weaken further."

Shen said Zhou’s reference to the 13th Five-Year plan, which starts this year and ends in 2020, points to the time horizon for China to move toward exchange-rate policy reforms.

China has no incentive to depreciate the currency to boost net exports, and there’s no direct link between the nation’s gross domestic product and its exchange rate, Zhou said in the interview. Capital outflows need not be capital flight, and tighter controls would be hard to implement because of the size of global trade, the movement of people and the number of Chinese living abroad, Caixin quoted him as saying.

Capital Outflows

Capital outflows from China are estimated to have hit $133 billion in January, the 22nd consecutive month of outflows from the world’s second-largest economy, the Institute of International Finance said in an e-mailed note Feb. 10. Capital outflows increased to $158.7 billion in December -- the most since September -- and were $1 trillion last year, according to estimates from Bloomberg Intelligence. That’s more than seven times the amount of cash that left the country in 2014.

The PBOC has stepped up efforts to stem the exodus, warning speculators they’ll be punished. It intervened in the Hong Kong market last month after the yuan’s offshore exchange rate sank to a record 2.9 percent discount to the onshore rate. Apart from selling dollars, the monetary authority also gave guidance to some Chinese lenders in the city to suspend yuan lending to curb short selling, a move that contributed to the surge in the overnight interbank lending rate to 66.8 percent on Jan. 12, an all-time high.

The bank will not let “speculative forces dominate market sentiment,” Zhou told Caixin.

The country will not peg the yuan to a basket of currencies but will seek to rely more on a basket for reference, while managing daily volatility versus the dollar, Zhou said in the interview. The bank will use a wider range of macro-economic data to determine the exchange rate, Caixin quoted him as saying.

"The central bank remains unwilling to give up its space for discretion in management of the exchange rate," Orlik said. "The critical tension is between allowing the market to play a greater role, and maintaining basic stability in the exchange rate. As long as it’s unclear which of those the central bank gives priority to, the market may continue to challenge its control."

— With assistance by Clement Tan, and Feiwen Rong

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