China will allow the market to set the value of the yuan, according to its central bank, and it will also allow policy to remain flexible so that credit growth will be encouraged.
Reuters reported Monday that the People’s Bank of China said it would also hold back on intervention. In a statement, PBOC Governor Zhou Xiaochuan Zhou said that monetary policy actions would be governed by liquidity conditions, in response to yuan demand, capital flows internationally and the balance of payments.
He was quoted saying, “The closer the yuan is to an equilibrium, the bigger role market forces will play in the yuan exchange rate. We will allow and encourage market forces to play a bigger role, and the central bank’s participation and intervention in the market will decrease in an orderly manner.”
Investors have been expecting a reduction in how much cash must be kept at PBOC by commercial lenders, after required reserve ratios were cut in November and again in February to lower them from their record high in June of 21.5%.
Zhou’s comments seemed to bear out that expectation. At the annual conference of the PBOC, held at the same time as the annual Parliament meeting, Zhou had said, “There is a lot of room for RRR cuts. But we need to look at whether it’s necessary … and look at market liquidity. We cannot raise or cut RRR at will when we think there is room. We need to look at the liquidity condition, which is related to FX purchases and our international balance of payments.”
Weekend data indicated that China’s trade balance fell by $31.5 billion into negative territory in February as the country imported far more than it exported. Data released Friday had also shown that inflation was down as the country’s raging economy slowed; industrial output, bank lending and retail sales all showed figures that came in below predictions.
Dariusz Kowalczyk, senior economist and strategist for Asia ex-Japan at Credit Agricole CIB, said in a note that trade data “means a bigger need to stimulate domestic demand–via fiscal stimulus and monetary easing. So we expect 200 bps more in RRR cuts and 50 bps in interest rate cuts later this year.”