PBOC's Zhou says no basis for continued yuan depreciation

Investing.com - Investing.com - China's central bank governor Zhou Xiaochuan said in an interview at the weekend there is no basis for continued yuan depreciation.
In an wide-ranging interview with financial magazine Caixin, Zhou spoke during a week-long holiday in China with markets shut, warning the PBOC won't allow speculators to dominate market sentiment, and downplayed concerns over the sharp decline in the country's foreign-exchange reserves over the past few months.
"Cross border capital flows are within a normal range," Zhou said. "The yuan exchange rate has maintained basic stability and even appreciated slightly. There is no basis for continued depreciation."
He warned the speculators targeting the yuan that it won't be "easy for them to make money when fighting against China given the size of the Chineseeconomy and the rich resources at its disposal.
"We will not let speculative forces dominate market sentiment. But it doesn't mean we will strike back every time they attack," Zhou said, noting that the PBOC needs to make effective use of its ammunition and minimize the costs to the central bank.
"If the previous pegged exchange rate was a 'steel shield' which didn't move, the flexible exchange rate is a 'sponge shield', which we can use to attack or defend appropriately against speculative forces," Zhou said.
Zhou also made it clear that the central bank is managing the yuan's exchange rate with reference to a basket of currencies, a stance that has become increasingly evident since last August through the daily fixing and through statements issued by the China Foreign Exchange Trade System (CFETS), the unit of the central bank that runs the country's interbank forex market. The CFETS launched its own trade-weighted Renminbi Index in December, comprising the currencies of 13 major trading partners.
"Maintaining the yuan's stability against a basket of currencies is the main theme of the yuan exchange-rate formation mechanism," Zhou said in the interview.
He said the government is still determined to push forward exchange-rate reform, aiming to rely more on market forces to set prices and realize a more flexible exchange rate.
"Even if there are short-term speculative forces in the market, we still respect the market," Zhou said.