PBOC’s Yi Says China Reserves ‘Very Adequate,’ Yuan Stable

People’s Bank of China Deputy Governor Yi Gang said the country has "very adequate" foreign reserves and the yuan remains strong compared with the currencies the central bank uses to set the exchange rate.

Capital will flow back to the country as the economy recovers and the business environment improves, Yi said in a Q&A statement released on the central bank’s website late Sunday. There’s no universal standard on the appropriate level of foreign reserves, and China still has the world’s biggest stockpile, Yi said.

The yuan advanced Monday by the most in more than three months after Yi’s comments, which came after three straight weeks of declines left the currency at an eight-year low. The remarks also step up the PBOC’s efforts to better guide market expectations before the new year, when annual caps on individuals’ foreign exchange purchasing are reset.

"The yuan’s one-way depreciation this year has made people wonder what’d happen next year, and they’re eager to convert money into dollars," said Larry Hu, head of China economics at Macquarie Securities Ltd. in Hong Kong. "The essential issue here is the expectation of depreciation is strong, so the PBOC needs to further tighten capital controls."

The yuan has demonstrated stability and strength amid recent global currency volatility and the dollar’s rally to fresh highs, Yi said. Recent declines are due to a strengthening dollar driven by a U.S. economic recovery and rising inflation expectations, he said, adding that the dollar may pare gains.

100 Percent

The odds of a Federal Reserve rate hike at its December meeting, the last for this year, have risen to 100 percent, according to futures trading data compiled by Bloomberg.

One common refrain of reassurance that there’s no basis for persistent declines in the yuan, often repeated by Beijing’s top policy makers including PBOC Governor Zhou Xiaochuan, was absent from Yi’s statement.

That much-repeated phrase has proven to be inaccurate, said Ding Shuang, head of China economic research at Standard Chartered Plc in Hong Kong. Having that assurance drop from one speech probably doesn’t indicate a shift in thinking at the central bank, he said.

Yi stressed that China has been stressing the yuan relationship with the basket for more than a decade. Declines on such a basis haven’t been as notable since October. A Bloomberg replica of the CFETS RMB Index, which tracks the yuan against 13 exchange rates, is close to its strongest level in three months.

Still, Ding said, most Chinese individual investors seem more anxious than institutional investors about yuan depreciation because Chinese citizens tend to think of currency stability from the dollar perspective, while professionals are more attuned to what policy makers say about the basket.

"It’s impossible to immediately change people’s long-standing habits, but the central bank is working on it," Ding said. "Until regular Chinese individual investors accept the concept of the basket, it’ll only be counterproductive to stress that."

— With assistance by Yinan Zhao