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Thursday, March 12, 2015, 16:58

China sticks to prudent monetary policy

By / Xinhua
China sticks to prudent monetary policy

Zhou Xiaochuan, governor of the People's Bank of China, answers questions at a press conference for the third session of the 12th National People's Congress (NPC) on financial reform in Beijing, capital of China, March 12, 2015. (Xinhua / Yin Gang)

BEIJING - A prudent monetary policy has not been changed, as this year's M2 growth target is still moderate, said Zhou Xiaochuan, governor of the People's Bank of China, at a press conference during the two sessions on Thursday.

Zhou said the M2, a key indicator to China's macro-economic policy, still targets moderate growth despite certain directed monetary instruments applied.

The country lowered this year's M2 growth target to 12 percent from 13 percent, said Premier Li Keqiang in his national work report to the National People's Congress, where he set the GDP growth target at about 7 percent, down from 7.5 percent in 2014.

Zhou said that the monetary tools applied by the central bank account for only a limited portion, compared with the overall size of Chinese economy.

"The 'new normal' is a normal state, not special, so there is no need to use a new word to explain the monetary policy," he said.

The central bank has cut benchmark interest rates twice since November. It also reduced the amount of cash that banks must hold as reserves in early February, in order to increase market liquidity and offset the increase of capital outflows.

"We should pay close attention to the prices changes when price fluctuations appear in the international commodity market. But we should be cautious and take a longer period to observe the changes."

Deposit insurance system likely in H1

China is expected to implement the deposit insurance scheme in the first half of this year, Zhou said Thursday.

Public response to draft deposit insurance regulations was generally positive, Zhou said at a press conference on the sidelines of the country's annual parliamentary session.

In the end of November, the Legislative Affairs Office of the State Council published the draft regulations for public opinions.

According to the draft, banks will pay insurance premiums and an agency will manage the money. The fund will pay maximum compensation of 500,000 yuan (US$81,500) per depositor if a bank suffers insolvency.

Deposit insurance is an important step in China's wide-ranging financial reforms, Zhou said.

A norm in more than 110 economies to protect depositors, it is considered a precondition for China to free up deposit rates - the last step in interest rate liberalization in the country.

Cross border capital flow 'normal'

Zhou said speculative capital flows do exist in China but a "vast majority" of the country's cross-border capital flows are associated with normal trade and investment activities.

It is difficult to give an accurate estimate of the amount of "hot money," or speculative capital flowing in and out of the country, but "it does exist," Zhou said.

He admitted there are capital outflows due to a lack of confidence in the economy but the number is not very large compared with the volume of normal trade and investment.

Yuan restrictions in Taiwan to be eased

The 20,000 yuan per person per day limit of renminbi currency conversions for Taiwan residents will be loosened as renminbi business develops and demand grows, said Zhou.

The Taipei branch of Bank of China has been engaged in the renminbi offshore settlement and clearance business.

Interest rate liberalization likely this year

"We have made great progress in the process of interest rate liberalization and the deposit rate ceiling was raised to 130 percent of the one-year benchmark deposit rate", said Zhou.

This year, it is very likely for China to fully open the ceiling limit of interest rate, Zhou added.

China hopes RMB included in SDR basket in 'near future'

One senior central banker said Thursday that China is "actively communicating" with the International Monetary Fund (IMF) on the possibility of including Chinese currency yuan, or RMB, in the basket of the Special Drawing Rights (SDRs).

"We hope the IMF can fully take into account the progress of RMB internationalization, to include RMB into the basket underlining the SDR in foreseeable, near future," said Yi Gang, vice governor of the People's Bank of China.

However, China keeps patience till conditions are ripe, Yi said at a press conference on the sidelines of the ongoing annual parliamentary session.

SDRs are international foreign exchange reserve assets. Allocated to nations by the IMF, an SDR represents a claim to foreign currencies for which it may be exchanged in times of need.

Although denominated in US dollars, the nominal value of an SDR is derived from a basket of currencies, with, specifically, a fixed amount of Japanese yen, US dollars, British pounds and euros, without RMB.

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