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China sees room for policy manoeuvring

Decision to depend on overall market liquidity

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has ample room to tweak policy to support in the face of 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 (PBOC) Governor 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 bank’s reserve requirement ratio.

“The RRR is just over 20 per cent now. We had a low RRR of six 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 was 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.

Yi Gang, deputy governor at the central bank and who oversees the management of China’s $3.2-trillion foreign exchange reserves, said China’s trade performance last month was evidence that the yuan is close to a “balanced” level.

The yuan’s value has been a lightning rod for disputes between China and its biggest trade partners including the United States, who accuse Beijing of deliberately holding down the currency for trade advantage.

China has always denied those allegations, and increasingly says it is allowing market forces to have a bigger sway over the yuan as it nears its fair value, an argument reiterated by Zhou.

“The closer the yuan is to a balanced level, the bigger role market forces will play in the exchange rate,” he said.

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