China PBOC's Zhou: FX Reform To Advance, But Not Main Priority

--Expansion of Yuan Fluctuation Range 'Not That Important'

     BEIJING (MNI) - Reform of China's foreign-exchange formation mechanism is

not the focus of the Chinese government's reform efforts at the moment and an

expansion of the yuan's daily fluctuation range is not an immediate priority,

People's Bank of China Governor Zhou Xiaochuan said Thursday at a news

conference of top Chinese financial regulators during the twice-a-decade

Communist Party Congress. 

     The regulators stressed the need to control risks and expressed China's

determination to further open up its financial market.

     Responding to a question on whether China would consider expanding the

fluctuation range of the yuan exchange rate, Zhou said such a move "is not that

important" because the current fluctuation range does not limit the yuan

exchange rate's function of pricing the demand and supply relationship in the

currency market.

     The current fluctuation range allows the currency to rise or fall up to 2%

above or below the PBOC's daily yuan fixing rate against the U.S. dollar. The

PBOC has recently allowed larger daily fluctuations in the dollar-yuan rate,

which has led to speculation that it would soon increase the official

fluctuation limit.

     Though not a focus of the government's financial sector reform efforts at

the current stage, foreign-exchange reform will nevertheless continue, Zhou

said. China's goal to make the yuan a freely floating currency is a long-term

process and more efforts need to be made in that regard, he added.

     Recent steps in the opening of China's financial markets include the

Shanghai-Hong Kong Stock Connect, the Shenzhen-Hong Kong Stock Connect and the

Bond Connect programs, as well as a further loosening of restrictions on foreign

investment in China's financial market, Zhou said.

     He noted that household leverage is rising rapidly, although that does not

necessarily mean China needs to deleverage the household credit sector. Rather,

regulators need to ensure the quality of new household credit to maintain the

health and stability of the sector, he said.

     PBOC Deputy Governor Yi Gang also explained at the Thursday press

conference the "two-pillar macro-control framework of sound monetary policy and

macro-prudential policy" mentioned in Chinese President Xi Jinping's opening

speech on Wednesday to the 19th Party Congress.

     The lesson from the 2008 financial crisis is that monetary policy is not

sufficient to maintain the stability of the financial sector, Yi said. Proper

macro-prudential policies are needed, as well, as financial market risks derive

mainly from pro-cyclical cross-market movements, he said.

     "Macro-prudential policies remedy such risks," Yi said, by helping to

stabilize the yuan's value and maintaining the stability of the financial

system.

     State Administration of Foreign Exchange (SAFE) chairman and PBOC Deputy

Governor Pan Gongsheng said that the current Chinese foreign-exchange market is

stable, and stressed that the opening of the door to China's economy and

financial sector would only become "bigger and bigger."

     Pan said SAFE would follow two guidelines in its management of the

foreign-exchange market: encourage a further opening of the sector by making

cross-border trade and investments in the market more convenient for investors;

and prevent liquidity risks from cross-border capital flows to maintain market

stability.

     China Banking Regulatory Commission (CBRC) Chairman Guo Shuqing stressed

the need to control risks in the banking system to forestall a financial crisis.

     Regulation of the banking sector needs to be strengthened, in particular

measures to tackle banks' problem assets, he said. 

     "Bank credit to the property sector needs to be strictly controlled, and

any increase in the volume of invisible [local] government debt needs to be

curbed ... while liquidity risks need to be strictly prevented," Guo said,

noting the commission is increasing regulation of negotiable certificates of

deposit, financial trusts and related cross-sector businesses.

     Guo said banks need to "have a greater role in supply-side structural

reform," meaning the banking sector should support deleveraging and capacity

cuts nationwide, as well as back a strengthening of regulations to prevent bad

loans.

     "We need to further deepen the reform and opening of the banking sector,

which is a fundamental step for risk control," Guo said. 

     Foreign banks' share of the Chinese banking sector has dropped even though

"their development in China is healthy and stable," Guo noted. This is harmful

to sustained competition and to the structural optimization of the sector, so

the banking sector needs to find a solution to enhance the opportunities for

foreign banks, he said. 

     China is encouraging private capital investments in the banking sector,

with solid achievements so far, and the future flow of private capital to the

sector must be "in order," Guo said. 

     Liu Shiyu, chairman of the China Securities Regulatory Commission, also

stressed the importance of risk controls, particularly those related to local

government debt.

--MNI Beijing Bureau; +86 (10) 8532-5998; email: iris.ouyang@marketnews.com

--MNI BEIJING Bureau; +1 202-371-2121; email: john.carter@mni-news.com

--MNI Beijing Bureau; +86 (10) 8532-5998; email: vince.morkri@marketnews.com

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