China has ample room to tweak policy to support credit growth in the face of volatile foreign capital flows that will inevitably see market forces play a greater role in determining the value of the yuan currency, the central bank said on Monday.
Speaking days after China posted its biggest trade deficit in at least a decade, People’s Bank of China Governor Zhou Xiaochuan signalled that Beijing has plenty of scope to relax monetary policy to juice up the cooling economy.
His remarks support well-entrenched bets among investors that China will further reduce the amount of cash its commercial banks must hold as reserves with the central bank, to free up more money for lending.
“There is a pretty big room for RRR cuts,” Zhou said at an annual press conference, referring to banks’ reserve requirement ratio.
“The RRR is just over 20 per cent now. We had a low RRR of 6 per cent in the late 1990s, even lower than that in some countries.”
But Zhou said future RRR moves will depend on the overall liquidity in financial markets, as determined by China’s balance of payments and total foreign currency purchases by the central bank and Chinese commercial banks.
“The biggest uncertainty in the international economy is, as we all know, the recovery, and especially with regards to Europe’s economy and the euro sovereign debt crisis,” Zhou said.
Zhou did not comment on speculation that China is ready to widen the yuan’s trading band to give the currency more flexibility, even as Beijing pushed the yuan sharply lower on Monday.
It has set a weaker trading midpoint for the currency in five of the last six trading sessions, fuelling some speculation in financial markets that Beijing may rely more on foreign exchange policy to stimulate exports and broader growth.
Data over the weekend showed China’s trade balance plunged US$31.5 billion into the red in February as imports swamped exports. It followed reports on Friday that inflation cooled in February while retail sales and industrial output fell below forecast, all pointing to a gradual cooling.
The trade data “means a bigger need to stimulate domestic demand ‒ via fiscal stimulus and monetary easing,” said Dariusz Kowalczyk, senior economist and strategist for Asia ex-Japan at Credit Agricole CIB, in a note.
A recent Reuters poll showed analysts expect Beijing to cut the RRR by a further 150 basis points this year when the world’s No. 2 economy is set to clock its slowest growth in a decade of between 8 and 9 per cent.