The yuan’s stable, fintech’s our future and stop overreacting over fall in foreign reserves, says China’s central bank chief
China’s central bank chief and other top People’s Bank of China officials held a press conference on Friday on the sidelines of the country’s annual plenary meetings.
Zhou Xiaochuan and his colleagues discussed a wide range of economic and financial issues.
We’ve summed up what they had to say about China’s yuan exchange rate, its dwindling foreign reserves and the future of digital currency, among other topics.
Reassurance on the renminbi
The central banker struck a reassuring note during the press conference on Friday morning, saying that the yuan had no basis for sustained depreciation.
“The yuan’s exchange rate will be relatively stable,” Zhou said, citing “healthy economic growth” and a “stable financial market” as reasons.
“As the Chinese economy stabilises and becomes healthier, and the nation makes achievements in supply-side reforms and global investors become more confident in China’s economy, the yuan’s exchange rate will naturally be on a trend to stabilise,” he said.
“We don’t have major changes to our related policies but we will be more precise when implementing and regulating the market. Therefore, under such circumstances, the yuan’s exchange rate will be relatively stable.”
The yuan has weakened about 10 per cent against the greenback since China reformed its pricing mechanism to better reflect market demand and supply in August 2015.
Last November, the exchange rate tumbled to eight-year-low levels amid concerns over an imminent Federal Reserve interest rate increase and talk that US President Donald Trump would launch pro-growth policies.
Zhou said suspicions about the yuan and the Chinese economy went too far last year, as some trading agencies and hedge funds that had built short positions against the yuan wanted to benefit from market panic.
‘Stop overreacting over foreign reserves’
Zhou said people had overreacted over China’s dwindling foreign reserves. The curent level was “not bad”, he said.
China’s foreign reserves had fallen from its peak of US$4 trillion to US$3 trillion, but Zhou said the reserves were meant to be used and that people should not overreact.
This was also partly a result of capital that had flowed into China following the financial crisis in 2008, now flowing back out, according to the central banker.
Foreign reserves were mobilised to contain the yuan’s depreciation. As a result, China’s foreign currency reserves – the world’s largest – fell for seven straight months through January, before a small increase in February.
In the wake of the 2008-09 global financial crisis, developed countries created about U$4.2 trillion liquidity through quantitative easing measures, as estimated by the International Monetary Fund.
“At least one-third of the money flowed to China,” Zhou said.
With the economic recovery of a number of developed countries, some money had now flowed out from China and other emerging markets as well, he said.
Fintech paving the way to the future
Zhou, who created a buzz by sporting an Apple Watch at the press conference, said the central bank was fond of new technologies such as digital currency.
The bank encouraged the development of financial technology and was willing to cooperate with industry participants to boost its development, he said.
“New technologies, such as digital currency and block-chain technology, will generate far-reaching impacts that may not be foreseen or predicted currently,” the central bank chief said.
One area affected, according to Zhou, was third-party payment services.
“The development of fintech will bring huge changes to future payment, but they are a progress as they bring many new tools.”
Internet giants like Alibaba, which owns the South China Morning Post, and Tencent have gained a large market share in electronic payment in recent years.
The PBOC, under Zhou’s leadership, has been open towards new technologies. Last year, it stepped up its research on a kind of “sovereign digital currency” and will unveil a research body soon, the first of its kind in major economies.
Although the central bank recently strengthened supervision over the trading of bitcoin – the world’s most popular digital currency – the move is widely believed to be aimed at countering money laundering and illegal outflows of capital.
Curbing outbound investment a ‘necessity’
Zhou said China’s recent efforts to curb some outbound investment were a “necessary” step because they went against industrial policy and raised foreign complaints.
“There are some overheated sentiments and blind decisions in China’s rapidly growing outbound direct investment,” he said. “Those that do not comply with national industry policies, such sports and entertainment investment, do no good to China but raise foreign complaints.”
Zhou’s comments come after China’s outbound investment surpassed foreign investment, causing concern about capital flight amid the US Federal Reserve’s interest rate increase and US President Trump’s expansionary fiscal policy.
China invested about US$170 billion overseas last year, much more than its US$126 billion inflow of foreign capital. The acceleration of outbound investment from 2014 was mainly led by private firms, rather than state-owned companies.
Chinese authorities released guidelines on outbound investment at the end of last year, labelling some cases, such as those in property, hotels, soccer clubs and entertainment, as “irrational investment”. State firms’ outbound investment have been tightened, while those of private firms are being scrutinised.
Zhou pointed out, however, that outbound investments that contributed to China’s research and development efforts as well as exports were still encouraged.
He also said China would continue to attract foreign investment, with such policies as the expansion of the country’s free-trade pilot zones.
