BEIJING – China’s top central banker signaled that Beijing and Washington are getting close to reaching a currency deal as part of their continuing negotiations to settle a yearlong trade battle.
“Both sides have reached consensus on many crucial and important issues,” People’s Bank of China Gov. Yi Gang said at a news conference on Sunday, held on the sidelines of the nation’s annual legislative session.
As part of the accord, Yi said, China won’t engage in competitive devaluation to give Chinese exporters a leg up in foreign markets – a commitment Chinese officials have also made in multilateral agreements such as those among the Group of 20 industrial nations. “This is what we promised. Absolutely we won’t do this.”
How China manages its currency has been a point of contention between Washington and Beijing for years. US President Donald Trump was vocal throughout his election campaign in saying China manipulates the yuan to gain an advantage in trade by making its products relatively cheaper. Trump repeated the charge last year, when the yuan’s plunge aroused suspicion that Beijing was pushing down its value to offset U.S. tariffs on Chinese products.
In recent trade talks, U.S. negotiators pushed their Chinese counterparts to keep the yuan stable and to improve transparency in currency-market interventions by China’s central bank. During a congressional hearing late last month, U.S. Trade Representative Robert Lighthizer said “we have spent a lot of time on currency and the agreement will be enforceable.”
Still, how the currency deal, if reached, will be enforced remains unclear. Both sides are haggling over an enforcement mechanism for the broader trade agreement. A senior Chinese trade negotiator, Wang Shouwen, told reporters Saturday that any such system must be “two-way, fair and equal.”
At Sunday’s news conference, Yi said both sides have discussed how they should disclose information when they buy or sell in foreign-exchange markets according to rules set by the International Monetary Fund. Another point of discussion, he said, involves how both nations should respect the autonomy of each other’s monetary policy.
That latter issue is of deepening concern to the PBOC because it doesn’t want a pledge to keep the yuan steady to tie its hands in supporting economic growth by loosening credit policy. Letting more yuan funds flow into the economy could pressure the value of the yuan.
The PBOC mainly looks at domestic factors when setting monetary policy, Yi said. “The exchange rate isn’t a major factor in domestic monetary policy.”
Many analysts and investors note that China’s promise not to engage in competitive devaluation isn’t much of a concession to the U.S. For a decade, China allowed a largely undervalued yuan to appreciate. After that appreciation trajectory ended in 2015, the yuan started to come under greater pressure, and the Chinese central bank has frequently intervened to prevent the currency from falling too much.
Too sharp of a depreciation, Chinese officials fear, could prod businesses and investors to move money offshore, potentially destabilizing a financial system already struggling with rising debt woes.
At the media briefing, Yi pointed to the central bank’s effort to keep the yuan stable in recent years, noting that it had burned through $1 trillion of its foreign-exchange reserves to defend the currency.
The Chinese central banker also sought to temper investors’ expectations for more aggressive monetary easing to prop up the slowing economy. A “neutral” monetary stance, Yi said, means that China will keep its overall leverage ratio stable.
In the past year, the central bank cut the amount of cash banks must keep in reserve five times, in a bid to unleash more funds for lenders to make loans. There is still room for such reserve-requirement reductions this year, Yi said, though the room has narrowed.
He also said the central bank will continue to foster competition among banks as a way to lower lending rates, but he gave no indication that any reduction in benchmark interest rates are in the cards. At the end of last year, credit amounted to 249.4% of China’s gross domestic product, he said, which was 1.5 percentage points lower than the level as of the end of 2017.