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PBOC governor says China has tremendous policy room if trade war escalates

THE WIRE WITH UP-TO-THE-MINUTE UPDATES

  • China has “tremendous” room to adjust monetary policy if the trade war further escalates

  • The current interest rate “very close to golden level”

 

China has “tremendous” room to adjust monetary policy if the trade war further escalates, said Yi Gang, governor of the People’s Bank of China, said in an exclusive interview with Bloomberg.

“We have plenty of room in interest rates, we have plenty of room in required reserve ratio rate, and also for the fiscal, monetary policy toolkit, I think the room for adjustment is tremendous,” he said. Yi said the currency has been weaker recently due to “tremendous pressure” from the U.S. side but the impact will be temporary.

Central bankers in China and beyond are increasingly signaling a willingness to mitigate the economic effects of the tariff war. The Federal Reserve and European Central Bank this week sounded more open to easing monetary policy, while Australia and India cut rates. Yi said China’s monetary policy has “to be in a sober mind position,” and the policy stance is prudent.

“I think our benchmark interest rate right now is in right level. I would say in terms of resources allocation at this level, I call it very close to golden level,” he said.

Yi also stressed that the value of the yuan should be set by market forces.

“A little bit of flexibility of renminbi is good for the Chinese economy and for the global economy because it provides an automatic stabilizer for the economy,” he said. “The central bank of China is pretty much not intervening in the foreign-exchange market for a long time, and I hope that this situation will continue, not intervening.”

The offshore yuan tumbled as much as 0.5 per cent on Friday, the most since May 13, before paring its loss, while China’s onshore markets were closed for the Dragon Boat holiday.

The yuan has stabilized in recent weeks as authorities voiced support for the currency following a rapid sell-off that pushed it near 7 per dollar — a level not breached since the global financial crisis. It still lost about 2.5% in May, among the worst in Asia.

Yi, who is set to meeting US Treasury Secretary Steven Mnuchin in Fukuoka, Japan, for Group of 20 meetings, said it’ll be a “productive talk, as always,” though the topic of the trade war would be “uncertain and difficult.”

This is the first publicly announced meeting since the trade talks fell apart last month and could pave the way for a meeting between Presidents Donald Trump and Xi Jinping, who will likely be in Japan at the end of the month for the G-20 leaders’ summit.

Yi gave no indication that the government was considering more fiscal stimulus now to counteract the effect of the trade war.

“Our fiscal policy this year is probably the largest and strongest fiscal reform package, in terms of the tax cuts, and also in terms of having more efficient fiscal resources allocation between the central government and the local government,” Yi said. “The current package is able to cover the cases where the situation is getting a little bit worse, but of course, if the situation gets tremendously worse, they will open the discussion. But right now they haven’t discussed that scenario yet.”

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