China says it is confident it can keep yuan stable

Shanghai: China is confident of keeping the yuan basically stable at reasonable and balanced levels, Yi Gang, the governor of the People’s Bank of China (PBOC) told a meeting recently, state media reported on Tuesday.

Yi has become the latest senior official to join a verbal campaign reminding markets about China’s exchange rate policy after the yuan experienced sharp declines recently by losing more than 2.5 per cent to the dollar since a major escalation in the Sino-US trade tensions earlier this month.

It is now less than a tenth of a yuan away from the 7-per-dollar level authorities have in the past indicated as a floor.

The likelihood of further interest rate rises by the US Federal Reserve has reduced, which should help keep the yuan stable, Yi was quoted as saying by the Financial News, a publication owned by the central bank.

The central bank chief also said China’s benchmark rates are now at appropriate levels.

“Yi’s comments were very prudent. And on the rate front, it could mean the PBOC has no intention to lower benchmark interest rates any time soon,” said Ji Tianhe, China rates and FX strategist at BNP Paribas in Beijing.

Market watchers said the central bank is expected to step up support and take further easing measures to bolster economic growth amid intensifying trade tensions between the world’s two largest economies. However, some are worried that additional easy policy measures could hurt the weakening yuan.

The yield gap between Chinese and US 10-year government bonds is in a relatively comfortable range, Yi said, according to the newspaper.

On Tuesday afternoon, the yield gap stood at 108 basis points, double the 54 basis points seen at the start of the year. A wider yield gap could mean lower capital outflow risks from China.

The Financial News said the governor’s remarks were made at a meeting on May 18 in Beijing.

Unlike previous episodes of yuan weakness, the PBOC has recently only set firmer-than-expected official midpoints and made rounds of verbal comments to guard its currency this time.

On the weekend, China’s banking and insurance regulator warned speculative short sellers they would suffer “heavy losses” if they bet against the currency.