Central banker welcomes flexible yuan, trade deficit

A trade deficit in the first two months of this year, as well as its impact on the exchange rate of the Renminbi in the forex market, is "a good thing" for China, the governor of China's central bank said Monday.

The supply-and-demand relation in the market is playing an increasing role in deciding the exchange rate of the Chinese currency, Zhou Xiaochuan, governor of the People's Bank of China (PBOC), said at a press conference on the sidelines of the ongoing annual parliamentary session.

China hit a trade deficit of 31.48 billion U.S. dollars in February, marking the largest trade deficit in a decade as import growth far outpaced exports, according to customs data.

The country's combined trade deficit reached 4.25 billion U.S. dollars in the January-February period after offsetting a trade surplus of 27.28 billion U.S. dollars in January.

The yuan weakened 209 basis points to 6.3282 against the U.S. dollar on Monday, marking the Chinese currency's devaluation of about 0.58 percent in terms of the central parity since it hit a record high of 6.2919 on Feb. 29, according to the China Foreign Exchange Trading System.

The fluctuation of the yuan's exchange rate is closely related to China's balance of payment and does not target one single currency, Zhou said.

If other major currencies are in unstable conditions, greater flexibility is also needed for the yuan's fluctuation mechanism to cope with market changes.

When asked about whether the yuan's appreciation has come to a close, Zhou said it depends on the supply-and-demand factor in the market.

"It is not a simple process," Zhou said.

According to the central banker, the rebalancing process of the global economy and the alleviation of China's unbalanced, uncoordinated and unsustainable problems will not be completed within a very short period of time.

"We need to take a longer period of time to see whether China's foreign trade will be balanced or not this year," Zhou said.

Yi Gang, vice governor of the PBOC and head of the State Administration of Foreign Exchange (SAFE), also described the trade deficit in February as a "positive sign" of a more even international balance of payment for China.

Yi told the press conference that China has made "remarkable achievements" in reducing the trade surplus, promoting more balanced foreign trade, expanding domestic demand and furthering economic restructuring.

The chief foreign exchange regulator said since the fourth quarter of 2011, the domestic spot and futures markets, as well as the non-deliverable forward offshore market, have expected the Renminbi's exchange rate to fluctuate in a two-way manner rather than just the single-direction of appreciation that was anticipated in the past.

Yi vowed to continue to improve the yuan's exchange formation mechanism and boost the flexibility of the yuan's two-way fluctuation due to more mature conditions created by China's international balance of payment and market expectations.

However, Yi said no one could tell the exact balanced point of the yuan's exchange rate, as it would be decided by the supply-and-demand relation in the market.

China will continue the market-based reform of the yuan's exchange rate formation mechanism and let the market play a greater role in the process to help with more balanced international payment and a more sustainable economy, Yi added.

During the process of the yuan's moving closer to a balanced point in the exchange rate, the central bank will gradually reduce its intervention in the market to better reflect a market-based and managed floating exchange rate system, Zhou said.

Last week, the PBOC governor said China is considering "appropriately" widening the daily trading band for the yuan

Currently, China adopts a managed floating exchange rate regime that is tied to a basket of foreign currencies. The PBOC announces a central parity for the yuan against nine other currencies on every trading day and allows the yuan to rise or fall by 0.5 percent from the rate every day.

As China improves its industrial structure and gradually reduces trade surplus, Zhou said last week in an interview with Xinhua that the yuan's exchange rate is now moving "very closely" to a balanced level.