China Reiterates It Won't Use Yuan Rate as Tool in Trade War

(Bloomberg) -- China won’t use competitive currency devaluation or the foreign exchange rate as a tool to cope with trade frictions, according to a senior central bank official.

“The yuan’s exchange rate is decided by the market,” Li Bo, director of the People’s Bank of China’s monetary policy department, said at a press conference in Beijing. He said the currency has more flexibility this year and the central bank is confident of keeping the rate “basically stable at a reasonable equilibrium level.”

Li said the PBOC has taken measures to prevent pro-cyclical activities in the foreign exchange market, and the good fundamentals of China’s economy supports the currency.

Li’s comments on Tuesday came after President Donald Trump accused China of manipulating its currency in an interview with Reuters. The world’s two biggest economies will resume talks this week about the trade dispute after an earlier deal collapsed in May. Trump is prodding China to offer more at the bargaining table, while the Chinese foreign ministry said it was hopeful of a positive result.

While the yuan has lost almost 5 percent in value against the dollar this year, it strengthened since touching a one-year low last week. The currency trades in a band on either side of a reference rate set by the central bank, with Tuesday’s fixing representing the strongest since July 26.

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The PBOC will step up monitoring of export companies and take measures to help those in difficulties, Ji Zhihong, director of the financial market department at the PBOC, said at the press conference. “We encourage financial institutions not to simply withdraw loans” from companies that are temporarily having difficulties but have good business prospects, he said.

With the trade war escalating to threaten an already slowing economy, China’s central bank has taken various steps this year to encourage banks to lend. Still, their risk appetite remains low and the transmission of monetary stimulus to companies is sluggish.

Solving that problem requires efforts from multiple parties, the PBOC’s Deputy Governor Zhu Hexin said at the press conference. The PBOC hopes funding will flow to small companies, high-tech manufacturing and the services sectors, instead of sectors with excess capacity and poor environmental protection measures, Zhu said.

“Chinese financial institutions have enough room to expand credit to support the real economy,” he said. “We’re working to make sure that bond market won’t only serve big companies but also small- and median-sized companies.”

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