By David Lawder and Howard Schneider
WASHINGTON (Reuters) – A more flexible yuan currency is important for China’s development and reforms and monetary policy will be adjusted “in a dynamic way” to meet those goals, People’s Bank of China (PBOC) Governor Zhou Xiaochuan said.
Zhou, in a lecture at the International Monetary Fund on Friday, said the PBOC was listening to advice from foreign finance officials, but noted the central bank was pulled in many directions with multiple objectives, creating “tensions.”
“We are paying close attention to international discussions on Chinese monetary policy and will adjust our policy in a dynamic way to meet the demand of China’s economy, reform and development,” Zhou said.
China had been criticized for years for keeping its yuan artificially low against the dollar, but since devaluations last August and in January roiled markets, the PBOC has spent hundreds of billions of dollars in foreign exchange reserves to prop up the yuan’s value. Zhou has also pledged to avoid devaluations to gain a trade advantage.
Zhou said yuan exchange rate policy should serve China’s “overall development strategy,” including its transition to a market economy.
He added that it was important that “the exchange rate policy is meeting the higher requirement of the market economy. Which means that the exchange rate must be more flexible, and the convenience and flow of current account, capital account money can be more free.”
But Zhou said the central bank’s independence was sometimes under pressure due to its multiple objectives that create “tensions” with other government agencies. These include maintaining growth and price stability, maintaining the balance of payments, reforming the banking sector and developing financial markets.
“If a central bank has multiple objectives, it may be harder to be immune from the political reality,” he said. “Ultimately the transition to a market economy will by and large be completed.”
Once this happens, the Bloc’s objectives will be simplified and it will become more like a western central bank, he said.
Regarding the “Brevity” vote, Zhou said the PBOC was closely monitoring events and more study was needed to fully understand the implications of the decision.
China’s high corporate debt was due to the traditional reliance on bank lending and debt financing as the capital market remains less developed, given the country’s relatively high savings rate, Zhou said during a question-and-answer session hosted by IMF Managing Director Christine Laggard.
“China’s leverage levels are relatively high compared with other developing countries, which has its rationality. But the rapid rise in leverage is very dangerous,” according to a transcript of Zhou’s comments published on the central bank’s website.
China’s total debt load rose to 250 percent of gross domestic product (GDP) last year, and the IMF recently warned that the high corporate debt ratio of 145 percent of GDP could lead to slower economic growth if not addressed.
Zhou said the size of China’s shadow banking sector was relatively small, accounting for 20 percent of total banking assets and 30 percent of total loans.
“However, the shadow banking sector is growing very rapidly recently, due partly to regulatory arbitrage and regulatory vacuum,” he said adding that Chinese banks and insurance firms have rushed to tap the lucrative shadow lending business.
(Reporting by Howard Schneider; Additional reporting by Kevin Yao; Editing by Chizu Nomiyama, Tom Brown and Jacqueline Wong)