China Won't Use Yuan as Tool to Deal With Trade War, Yi Says

(Bloomberg) -- China won’t use its currency as a tool to deal with trade conflicts, central bank Governor Yi Gang said, as a tariff war between the U.S. and the world’s No. 2 economy intensifies.

“China will continue to let the market play a decisive role in the formation of the RMB exchange rate,” Yi said in a statement to the International Monetary and Financial Committee, which was posted on the IMF’s website on Saturday. “We will not engage in competitive devaluation, and will not use the exchange rate as a tool to deal with trade frictions.”

He added China will continue to push ahead with the market-based reforms of its interest rate and exchange rate systems, and keep the currency “broadly stable at an adaptive equilibrium level.”

The Chinese currency has tumbled more than 9 percent against the dollar in the past six months. Still, pressure on the yuan eased in recent days amid reports U.S. President Donald Trump and Chinese President Xi Jinping plan to meet in November, and the U.S. Treasury Department is being advised not to name China a currency manipulator.

The relief may be temporary. Looser domestic monetary policy, concerns about economic growth and a further escalation in the trade war will continue to weigh on the yuan, pushing it closer to the psychologically important level of 7 per dollar, which analysts predict to happen by the middle of next year.

China’s economy has sustained steady growth in 2018, and overall risks are in control, Yi said, according to the IMF statement.

Policy makers in Beijing have been trying to stimulate growth without causing a debt blowout as trade tensions complicate the outlook for an economy that’s already slowed moderately because of a domestic financial cleanup. That’s hurt investor sentiment with the nation’s benchmark stock index staying in a bear market.

Monetary policy will “remain neutral with more focus on guiding expectations,” Yi said. Authorities will adopt proactive adjustment and fine-tuning to ensure that the monetary stance will remain appropriate amid a changing economic and financial landscape, he said.

©2018 Bloomberg L.P.