China's monetary policy tightening will continue for some time as inflation remains higher than the government is comfortable with, and the yuan will be one of the tools used to fight it, the central bank governor said on Saturday.
Zhou Xiaochuan, head of the People's Bank of China, said China was using the yuan as a tool in fighting inflation and will make the currency more flexible over time. "The shift from a moderately loose monetary stance to a prudent one means tightening, and this stance will continue for a while," Zhou told a press briefing on the sidelines of the Boao Forum for Asia on the tropical Chinese island of Hainan.
The yuan has risen 4.5 percent against the dollar since the end of a de facto peg last June, but it has fallen by 4.3 percent since that time against a trade-weighted basket on account of dollar weakness, data from the Bank for International Settlements show.
Zhou said China did not have pre-set targets for the yuan's value. Instead, Beijing would respect the role of market demand and supply in deciding the yuan's exchange rate. He noted that international calls for a stronger yuan were in line with China's own efforts to adjust its economic structure and boost incomes, but said there was still no timetable for when the currency would become fully convertible.
China could not accept accusations that the yuan was a cause of global financial turmoil, he added. "If you regard China's yuan issue as the key cause of the international financial crisis and want to use the yuan as the key solution to overcome the crisis, then we can't agree with that," he said. Zhou said the March inflation reading of 5.4 percent from a year earlier was higher than the government target, meaning the central bank had to take further measures to ease price increases.
But he said China would be cautious in raising borrowing costs further, out of concern for attracting inflows of speculative capital seeking returns not only from yuan appreciation but higher interest rates. The PBOC has increased benchmark interest rates four times since last October, bringing its rates much higher than in economies such as the United States.
"The international market has excessive liquidity, and if we raise interest rates in an excessive or aggressive manner, we may attract big hot money inflows," Zhou said. The PBOC has increasingly relied on quantitative tools to mop up excess cash in the financial system, now requiring the country's big banks to set aside a record-high 20.0 percent of their deposits as reserves.