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REPEAT:China PBOC Zhou: FX Reform To Advance, But Not Priority

Repeats Story Initially Transmitted at 10:41 GMT Oct 19/06:41 EST Oct 19
--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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