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China Has Ample Room To Cut Reserve Ratio Further, PBoC Zhou Says


China has ample scope to reduce the banks' reserve requirement yet again, but any such move will be based on factors like foreign exchange inflows, People's Bank of China Governor Zhou Xiaochuan said Monday.

Speaking at a press conference during the National People's Congress (NPC), the policymaker noted that the central bank's reserve requirement ratio (RRR) cuts in December and February were a response to changes in the capital inflows and foreign exchange reserves.

He said such moves are not necessarily an indication of monetary loosening. In February, the central bank cut the banks' reserve requirement rate for the second time in three months to boost lending. The RRR now stands at 20.5 percent.

Reflecting sluggish global demand, China recorded a trade deficit of $31.5 billion in February, the biggest in more than two decades. However, Zhou said a trade deficit in the first two months of this year and its impact on the exchange rate is "a good thing" for China.

The Chinese economy expanded at the slowest pace in more than two years in the fourth quarter of 2011 as a result of weak external demand and Beijing's past policy tightening to contain inflation and property prices.

Premier Wen Jiabao said last week that China will aim for 7.5 percent economic growth this year, lowering the target from 8 percent for the first time in eight years. The economy expanded 9.2 percent in 2011, easing from 10.4 percent in 2010.

The yuan reference rate was fixed at 6.3282 on Monday, 0.3 percent lower than Friday's fixing. Zhou said last week that China may "appropriately" widen the yuan's trading band to better reflect market supply and demand.

The policymaker said today that the sluggish world economic recovery and the unstable economic and financial situation in Europe will be the biggest uncertainty for China's economy this year.

Zhou noted that markets expect two-way movements for the yuan exchange rate. The supply and demand relations in the market are playing an increasing role in deciding the exchange rate of the Chinese currency, he added.

In a statement distributed earlier in the day during the NPC, the central bank said that China will manage it vast foreign exchange reserves in an effective and innovative manner. The bank also said it will proceed steadily with reforms of exchange rate and market-based interest rates.

by RTTNews Staff Writer

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