China tries to reassure trade partners on yuan, markets ahead of G20 meet

A customer holds a 100 Yuan note at a market in Beijing, in this on Aug 12, 2015 file photograph.
A customer holds a 100 Yuan note at a market in Beijing, in this on Aug 12, 2015 file photograph. PHOTO: REUTERS

SHANGHAI (REUTERS) - China's leaders voiced support for the embattled domestic currency on Thursday (Feb 25), with the country's vice finance minister saying policymakers are committed to market transparency and aware of the impact their decisions have on other economies.

The comments come ahead of a meeting of finance ministers and central bankers from G20 nations in Shanghai on Friday and Saturday, at which current market turmoil and a global economic slowdown are expected to be key topics of discussion.

Zhu Guangyao, vice finance minister said that China would seek to keep the exchange rate stable while maintaining its current "managed float" regime. China's current foreign exchange management theoretically allows market forces input into the way the yuan is priced against other currencies.

"We do recognise the risk the global economy faces," he said at a conference held by the Institute of International Finance linked to the G20 summit. "We also understand how important it is to correctly communicate with the market," he added.

Mr Zhu's statements followed similar comments earlier in the day at the same conference by the of the Industrial and Commercial Bank of China (ICBC) Jiang Jianqing, who said there is no market basis for further yuan weakness.

This dovetails with previous statements by regulators and central bankers in China.

Such calls in the past, however, have had little impact in fending off bearish pressure against the currency, with famous international investors like George Soros publicly arguing that the currency is set to decline further.

US Treasury Secretary Jack Lew, in an interview with the Wall Street Journal published on Thursday, said China must make it clear that there is no "major devaluation" in the pipeline.

The People's Bank of China (PBOC) conducted a surprise one-off devaluation of the official guidance rate in August, which it argued would allow the market to reset at its natural level, but investors have continued to move out of the currency since and the exchange rate has slid further.

In a speech at the same conference, central bank vice governor Yi Gang said that investors can expect more fluctuations by the yuan against the US dollar as the People's Bank of China moves to put more emphasis on measuring the yuan's value against a basket of currencies.

The Ministry of Industry and Information Technology said during a separate press conference in Beijing on Thursday that China's exports and currency remain under pressure, adding the ministry would invest 100 billion yuan (S$21.45 billion) over two years to relocate workers during China's industrial restructuring.

The onshore currency market remained relatively flat in morning trade after the comments, changing hands at around 6.53 per dollar, having softened around 0.6 per cent since markets reopened after a week-long holiday earlier in the month.

The offshore yuan firmed slightly in morning trade but remained weaker than the onshore rate.

Stock markets, however, tanked, with major onshore indexes losing around 3.5 per cent, set for their worst day in nearly a month.

Like other economies, China is struggling to balance short term stability with structural reforms that might risk generating unemployment and social unrest, and many economists are skeptical that much can come from the G20.

A report published by the International Monetary Fund (IMF) on Wednesday called for a coordinated stimulus program to support a slowing global economy.

"The G20 must plan now for coordinated demand support using available fiscal space to boost public investment," IMF staff said in the report.

The Shanghai meeting is already being compared with the G20 meeting in April 2009 when officials agreed on coordinated stimulus to prevent a worldwide depression during the global financial crisis. However, few expect this year's conference to produce similar results.

"Calls for co-ordinated policy easing ahead of this weekend's G20 meeting will almost certainly come to nothing,"wrote Andrew Kenningham, senior global economist at Capital Economics in London.

China, however, appears to be positioning itself for aggressive fiscal stimulus, hoping it can migrate its economy away from overdependence on low-end export manufacturing to something more sophisticated without setting off a wave of layoffs, a balancing act PBOC's Yi Gang referred to as"delicate".

Vice finance minister Zhu also said that China had room to increase its fiscal deficit this year and would take necessary measures to deal with systemic risks while communicating with the market.

Such increases would have to be approved by Premier Li Keqiang at the annual meeting of parliament which begins March 5.