No change in monetary policy: central bank(3)

Renminbi exchange rate relatively stable

The fluctuation in renminbi exchange rate has been normal and relatively small, compared with other currencies in the world, said Zhou Xiaochuan, governor of the country's central bank, on Thursday at a press conference.

Zhou said that along with the opening up of Chinese economy, the renminbi exchange rate depends on the demand and supply in international market, not just only on the country's economic fundamentals.

"Such fluctuation can ordinarily be handled by trade companies, investors and other financial market participants," said Zhou.

He added that currency fluctuations also reflect the international situation, and given last year's political problems around the world, the renminbi exchange rate has been relatively stable compared with other currencies.

"The stock connect between Shenzhen and Hong Kong bourse will roll out this year," he announced, along with other new measures, to enhance interconnection between the capital markets and support Hong Kong's role as the offshore renminbi center.

Renminbi will join SDR in near future

Renminbi is moving toward a freely convertible currency and will undoubtedly join the Special Drawing Rights (SDR) in the near future, said Yi Gang, head of State Administration of Foreign Exchange, at a press conference on Thursday.

As progress can be seen in both renminbi's onshore and offshore markets, the country will carry on financial reforms regardless of whether or when the currency will join the SDR.

The International Monetary Fund is expected to review the SDR components later this year, which is held every five years.

Renminbi's internationalization has been on a fast track over the past five years, as the yuan note is now the second-most used currency in trade finance and the sixth-most used in settlement, and also acts as reserve currency in some regions, said Yi Gang.

Yi said the inclusion of renminbi will come from a natural move and will enhance the representativeness of the SDR.

The inclusion will do good to pushing reform of the international monetary system and China's finance sector, said Yi, adding that the authority is in active communication with the IMF.

Yi added that he sees no reason to adjust the current peg system between the Hong Kong dollars and the US dollars. The mechanism is in healthy function, said Yi.

Background information

The central bank, following an earlier cut in November last year, announced a 25 basis point cut in benchmark interest rates from March 1, lowering the one-year lending and savings rate to 5.35 and 2.5 percent respectively.

The cut coincide with the weak economic data which showed the country's economy fell to its lowest level of growth in the first two months of the year since the financial crisis.

The National Bureau of Statistics reported on Wednesday that industrial output growth year-on-year dropped to 6.8 percent in January and February, from 7.9 percent in December, with retail sales growth slowing to 10.7 percent from 11.9 percent in December.

Fix-asset investment growth also fell to 13.9 percent in the first two months, led by the slowdown in manufacturing and infrastructure sectors.

"To offset the headwinds to economic growth, we now expect monetary policy to be loosened even further," said Zhao Yang, China chief economist of Nomura, in a note on Thursday. The financial institution projects three more rate cuts this year, each by 25bp, and three 50 bp cuts to reserve requirement ratio.