Author: Fran Wang
Posted on: Caixin Global, March 10th , 2017
The yuan’s exchange rate will stay stable this year, China’s central bank governor said on Friday, as Beijing seeks to downplay concerns about capital outflows that were partly fueled by depreciations in the Chinese currency.
China’s economy will further stabilize this year and become healthier with the deepening of supply-side reforms, and international investors’ confidence in the country will improve, laying the foundation for the stability of the yuan, People’s Bank of China Governor Zhou Xiaochuan told reporters.
Beijing’s foreign-exchange-related policies will remain consistent in 2017, although fine-tuning their execution and supervision will be necessary, he said at a news conference on the sidelines of the ongoing National People’s Congress, China’s top legislature.
“Therefore, we believe … this year’s yuan exchange rate will be relatively stable,” he said. However, reasonable exchange rate fluctuations are “normal” due to uncertainties in the global economy and “various events that may take place in China,” he added.
Zhou blamed the yuan’s dramatic volatilities in the second half of 2016 on strong overseas investment by Chinese companies and the U.S. dollar’s robust appreciation after Donald Trump won the U.S. presidential election, which “caused many changes that went against average people’s expectations.”
The strengthening of the dollar and previous pessimism about China’s growth have sparked a wave of money outflows for the past year and a half. The country’s capital account started logging a deficit from the second half of 2014 and the yuan weakened by about 6.5% in 2016, which in turn fueled the surge in capital flight.
Currently the yuan is trading at about 6.9 to the U.S. dollar.
Beijing has taken a series of measures to curb the trend, including scaling back the country’s holdings of U.S. Treasury bonds, selling dollars and buying yuan to bolster the Chinese currency’s value. This was accompanied by a decline in China’s foreign exchange reserves.
Authorities have also stepped up restrictions on domestic company investments overseas since late last year and enhanced scrutiny of individuals’ requests for foreign currency.
Zhou on Friday defended the limits on Chinese firm’s overseas spending spree, branding some investment as being “blind” and fuelled by a buying frenzy.
“Entrepreneurs… were all considering investment abroad. Some were driven by an overheated sentiment and invested blindly,” he said. Takeovers in sectors such as sports and entertainment “have little benefit for China” and “sparked complaints overseas,” he said.
“We think it is necessary and effective to give some policy guidance (over such activities) to a certain level,” he said.
The country’s forex reserves, the world’s largest, rose to $3.0051 trillion last month from $2.9982 in January, snapping a steady decline since July.
The State Administration of Foreign Exchange has hailed the gain in February’s foreign currency stockpile as reflecting cross-border capital movements getting “balanced overall,” forecasting that pressures on money outflows will ease.
China’s forex reserves peaked in June 2014 at nearly $4 trillion.
Zhou said a stockpile of that high amount was “unnecessary” for the Chinese economy. Part of it was driven by hot money inflows as cash unleashed by quantitative easing measures in developed countries after the global financial crisis found their ways into financial markets in emerging economies.
Some of the funds are flowing back to developed countries as their economies recover, from not only China but also other emerging markets including Russia, Brazil, South Africa and India, he said.
“We will take it easy while making policies, even though there are problems to solve,” Zhou said. “We may have overacted in some links, but we will fix them as soon as possible.”