China central bank governor: No basis for continued depreciation of yuan

SHANGHAI (BLOOMBERG) - China's central bank governor said there is 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.

The draw-down of China's reserves has continued since the devaluation of the currency in August, with holdings falling by US$99.5 billion in January to US$3.23 trillion, the central bank said on Feb 7.

The stockpile slumped by more than a half-trillion US dollars in 2015.

"Zhou has effectively ruled out any devaluation," said Shen Jianguang, chief Asia economist at Mizuho Securities Asia 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.