Central bank bullish on yuan prospects

PBOC has adequate tools to ward off threats from unexpected swings

The People's Bank of China, the central bank, said on Thursday that a currency crisis was unlikely in the country as the long-term optimistic outlook and adequate policy tools would help ward off any potential threats from unexpected currency swings.

Depreciation and appreciation are both likely for the renminbi in the coming days, and the monetary authority has confidence and capacity to maintain the currency value at a reasonably stable level, Liu Guoqiang, a vice-governor of the PBOC, said in a statement on the bank's website.

The renminbi's recent performance is still within reasonable range and the market has remained stable. Wild fluctuations of the currency will not be allowed, said Liu.

"Based on global experience, currency crisis is rare in large countries," said Liu. "As the second largest economy, there is very little chance of a currency crisis in China."

Similar views were expressed by Pan Gongsheng, head of the State Administration of Foreign Exchange (SAFE), on Sunday, after the onshore renminbi depreciated to 6.9182 per US dollar on May 17.

"Recent comments from policymakers have emphasized maintaining stability of the renminbi," said Maggie Wei, an economist with global investment bank Goldman Sachs.

The spot exchange rate of the onshore renminbi stabilized at around 6.91 per US dollar this week, and the central parity rate was set at 6.8994 per US dollar on Thursday.

The central bank said it would issue more debt in Hong Kong, the renminbi offshore market, following a 20 billion yuan ($2.91 billion) issuance on May 15.

The central bank bill is a debt-financing instrument through which the monetary authorities can absorb funds from investors and tighten liquidity. It can lift the offshore market interest rates and increase costs if speculators short the renminbi, especially when the currency is under pressure.

Due to the rising China-US trade friction, the renminbi showed some depreciation recently, said Liu, terming the external uncertainty as a "bump" in China's development and something that can hardly change the long-term positive outlook.

In the medium to long term, the renminbi's exchange rate will depend on the economic foundation, which is still resilient, with great development potential, he said.

Renminbi exchange rate's reaction to market expectations is natural in a market-oriented economy and indicates the foreign exchange rate is playing the role of an "automatic stabilizer" for macroeconomy and international payments, Liu said.

A stable exchange rate can be supported by the latest macroeconomic indicators being maintained within a reasonable range, stable macro leverage level, limited fiscal and financial risks, balanced international payments and sufficient foreign exchange reserves, according to the central bank vice-governor.

Latest data from SAFE indicate foreign exchange inflows of $2 billion in April, with the net inflow supporting a stable currency.