World Economy

PBOC Keeps Yuan Stable

PBOC Keeps Yuan StablePBOC Keeps Yuan Stable

China will fine tune monetary policy and keep the yuan basically stable while guarding against systemic financial risks, the country’s central bank said Sunday in its fourth-quarter monetary policy report.

China will also maintain an appropriate level of liquidity and achieve reasonable growth of money and credit, Reuters quoted the People’s Bank of China as saying in its report.

The report comes after China announced economic growth of 6.9% for 2015, its weakest in 25 years, while depreciation pressure on the yuan adds to the case for the central bank to take more economic stimulus measures over the near-term.

In the report, the bank said it will ‘fine tune policy in a timely manner’ and ‘flexibly use various policy tools … to help maintain appropriate liquidity and reasonable growth in credit and social financing’.

It also said it will seek to explore mechanisms to enhance management of interest rates, while increasing the flexibility in both directions of the yuan exchange rate.

It will improve the yuan regime and ‘let the market play a bigger role in setting the exchange rate, increasing two-way flexibility of the renminbi exchange rate, keeping the yuan basically stable at a reasonable and balanced level’.

The PBoC said it will expand channels for yuan inflows and outflows and at the same time improve the prudential management of cross-border capital flows.

Tightening Liquidity

Liquidity often tightens ahead of China’s Lunar New Year holidays, which begin on Monday. In the past month, PBoC has repeatedly injected money into banking system via short- and medium-term lending tools and increased frequency of its open market operations.

The PBoC also said in the report that it will improve management of risks created by local government debt.

A slew of economic indicators has sent mixed signals to markets at the start of 2016 over the health of China’s economy.

Decline in Reserves

China’s foreign exchange reserves declined by about $100 billion in January, falling to their lowest level since May 2012, as the country’s central bank sold US dollars to cushion a rapid descent in the yuan’s value, as well as to stem capital outflows. Foreign cash reserves dropped to $3.23 trillion, PBOC said.

Economists surveyed by Bloomberg forecast a deeper cut in the world’s largest cash hoard, expecting it to shrink to $3.21 trillion. China’s foreign exchange reserves fell by more than $500 billion during 2015—the first ever annual drop—as the Chinese government battled a stock market rout, slowing factory production and falling exports last year. Beijing is burning through its cash reserves in efforts to prop up the yuan and to spur economic growth through stimulus measures.

Zhou Hao, an economist at Commerzbank, said that although the extent of the reduction in forex reserves was “not surprising”, it highlighted the policy challenges the government faced.


Quick Buck

A new breed of small investors is riding China's rollercoaster stock markets, looking for a quick buck and thriving on the volatility that has sent others scurrying to the exit clutching their stomachs.

Last summer's 40% crash and a 20% drop so far in 2016 have sent trading volumes tumbling on the Shanghai and Shenzhen bourses, where retail investors account for 85% of the business, unlike more developed markets, where institutions dominate.

Many investors have not just been put off by the falls, but by the wild intraday swings, with sharp morning gains frequently swallowed by sharper afternoon losses.

Not Zhao De. The 26-year-old Beijinger only has around 55,000 yuan ($8,400) to play with, and he wants to make it work hard and fast.

He's currently out of the stock market, not because it's too volatile, but because it stops him making the most of that volatility. He wants to take bigger positions for shorter periods, but the stock market makes him wait a day for trades to be settled, which prevents intraday trading.

He's in commodity futures for now. "If I buy futures, I can directly short sell," he said.

Liu Jingde, Cinda Securities analyst, said this growing new cohort of investors is more open to the opportunities to make money and has a greater willingness to take risks, using futures and options products.

"It could make the fluctuations of the market more extreme if these investors take more frequent short-term positions," he said.