Yi Says China Largely Ended Currency Intervention in Market Tilt

(Bloomberg) — People’s Bank of China Governor Yi Gang said that Beijing has largely ended regular foreign-exchange intervention, and pursues a policy aimed at enhancing the ease of use of the yuan for Chinese households.

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PBOC officials still “reserve the right” to intervene in the market, Yi said in a speech at the Peterson Institute for International Economics in Washington on Saturday. “I haven’t announced” that there is no intervention, he said.

But he said his own perspective is that history shows that “sooner or later” the market defeats the central bank. A slide in Yi’s presentation at the PIIE showed that “in recent years, PBOC has by and large exited from regular intervention.”

In its semiannual foreign-exchange reports, the US Treasury Department has consistently criticized China for a lack of transparency in how the country manages its exchange rate. The latest, in November, highlighted that China is an “outlier” in its lack of disclosure. Beijing offers limited information on things including even the “policy objectives of its exchange rate management regime,” the Treasury said.

“Basically you can still call it a managed, floating regime, but it has to be primarily determined by market,” Yi said of China’s foreign-exchange policy. “It’s still working.”

While Yi, in answering questions, said “I don’t have a date” for when the yuan could be made freely convertible, the basic policy is to enhance the ease of use of the currency. Yi — who studied and taught economics for years in the US — shared with his audience a personal tale of frustration in a younger age of having to turn to a friend to change yuan into foreign currency.

Interest Rates

By contrast, today, Chinese individuals can exchange as much as $50,000 a year into foreign currency, and 99% of them don’t use up that quota, Yi said. That means the quota isn’t imposing a constraint, he said.

More broadly, the US-China exchange rate is in “equilibrium,” with no sudden, large capital flight, Yi said. He added that China isn’t pursuing a capital-account surplus.

In a somewhat technocratic presentation, the PBOC chief — who was unexpectedly reappointed governor in March — said that China’s central bank has “twin pillars” of pursuing price and financial stability. In practice, over time, the aim is for the inflation-adjusted interest rate to average slightly below the real economic growth rate.

Yi noted that the calculation of China’s potential growth is “very controversial,” without delving into the politics of that debate. He did note that economists at Beida — Peking University — think China’s potential is “very high.” But in his own slides on Saturday, Yi used estimates compiled at Tsinghua University. One of his slides showed that that figure was slightly higher than 5% as of last year, down from 8% in 2012.

Debt Talks

The PBOC under Yi has adopted a measured easing approach since the pandemic began, avoiding cutting interest rates significantly or using unconventional measures, like quantitative easing. China’s economy has been rebounding since the government scrapped Covid restrictions late last year, though the strength of the recovery is under debate following contradictory signals from recent data.

Economists are divided over whether the PBOC should be stepping up stimulus to bolster growth.

Yi was in Washington this week to attend the International Monetary Fund and World Bank’s spring meetings, participating in talks to restructure billions of dollars of debt held by poorer nations. He also held a meeting with Group of 20 central bankers and finance ministers, telling them that China’s economy is expected to grow around 5% this year, inflation remains low and the property market is improving.

In answering a question about talks over alleviating Sri Lanka’s debt burden, Yi reiterated China’s stance that generally there should be “equal and fair” treatment among creditors. He also urged global cooperation.

Asked about bilateral talks with US and the possibility of Treasury Secretary Janet Yellen visiting China at some point, Yi said that communication between the largest economies is important at this time given the challenges faced by the global economy.

–With assistance from Yujing Liu.

(Updates with further comments throughout.)