PBOC chief sees ‘tremendous room’ to adjust policy if trade war deepens

Bloomberg

China’s central bank governor said there’s “tremendous” room to adjust monetary policy if the trade war deepens, joining counterparts in Europe and the US in displaying readiness to act to support the economy.
In an exclusive interview with Bloomberg in Beijing, People’s Bank of China (PBOC) Governor Yi Gang also signalled that he’s not wedded to defending the nation’s currency at a particular level, and stressed that the value of the yuan should be set by market forces.
Yi and US officials including Treasury Secretary Steven Mnuchin are set to meet in Fukuoka, Japan, for Group of 20 meetings this weekend.
The PBOC chief said it’ll be a “productive talk, as always,” though the topic of the trade war would be “uncertain and difficult.”
Central bankers in China and beyond are increasingly signalling a willingness to mitigate the economic effects of the tariff war. The Federal Reserve and European Central Bank this week sounded more open to easing monetary policy, while Australia and India cut rates. Yi said China’s monetary policy has “to be in a sober mind position,” and the policy stance is prudent.
“We have plenty of room in interest rates, we have plenty of room in required reserve ratio rate, and also for the fiscal, monetary policy toolkit, I think the room for adjustment is tremendous,” he said. Yi said the currency has been weaker recently due to “tremendous pressure” from the US side but the impact will be temporary.
“A little bit of flexibility of renminbi is good for the Chinese economy and for the global economy because it provides an automatic stabiliser for the economy,” he said.
“The central bank of China is pretty much not intervening in the foreign-exchange market for a long time, and I hope that this situation will continue, not intervening.”
The G-20 meeting takes place as the two nations escalate their trade war amid a darkening outlook for the global economy, with Citigroup Inc. and Morgan Stanley warning this week that it risks tipping the world into recession. This is the first publicly announced meeting since the trade talks fell apart last month and could pave the way for a meeting between Presidents Donald Trump and Xi Jinping, who will likely be in Japan at the end of the month for the G-20 leaders’ summit.
The offshore yuan tumbled as much as 0.5 percent, the most since May 13, before paring its loss.
The yuan has stabilised in recent weeks as authorities voiced support for the currency following a rapid sell-off that pushed it near 7 per dollar — a level not breached since the global financial crisis. It still lost about 2.5 percent in May, among the worst in Asia.
Yi expanded on the PBOC’s current monetary policy settings, which officials describe as “prudent.” Economists expect the PBOC to lower reserve-requirement ratios for banks by 100 basis points by the end of 2019, while keeping benchmark interest rates unchanged, according to a Bloomberg survey in May.