China sees economy recovering; makes multiple protective forex plans

In the wake of China's record budget deficit of 950 billion yuan ($139 billion) for 2009 - the highest in six decades announced yesterday (See: China's budget records highest fiscal deficit in six decades), Zhou Xiaochuan, governor of China's central bank today said that China has made multiple protective arrangements to prepare itself for any further negative impact of the global financial crisis.

According to Zhou, China had moved rapidly in the midst of the global financial crisis to improve its monetary policy which is beginning to take effect.
"The economic figures are stabilising and recovering, which demonstrates that the policies have begun to show an impact," said Zhou.

At a press conference held on the sidelines of the parliament's annual session, Zhou said that China had moved from a tight monetary policy employed in early 2008 to a moderately easy one as the global financial crisis had increased in the second half of the year.

He added that the government would rather act faster and take more strong measures to prop up confidence and boost the revival of the economy amid the crisis.

Zhou maintained that China had a policy of keeping the Renminbi exchange rate stable at an appropriate and balanced level and is relatively comprehensive and enough.

Premier Wen Jiabao's statement distributed to the media at the opening of the parliament's annual session yesterday, reaffirms the currency policy "needs no changes," said Zhou.

On being asked whether there was a possibility of depreciating the yuan to prop up economic growth, he said, "The countries where the financial crisis originated should be questioned. 

Zhou said that "We have to keep multiple arrangements and analyse several scenarios in the wake of greater uncertainty on their side and further added that the government won't disclose its intention until the picture gets clearer.

In 2005 China discarded a fixed currency peg with the US dollar for a managed float which resulted in the Renminbi appreciating around 20 per cent against the dollar.

In November, 2008 China let the currency depreciate moderately and the Renminbi has since then traded in a narrow band against the dollar.

China has continued to record large current account surpluses in spite of the gradual appreciation in the Renminbi.

The US has been of the opinion that China has artificially depressed the value of its currency to boost exports which is detrimental to business in the US. China is the largest foreign holder of US Treasuries after Japan.

Forex stockpile
China, holding the world's largest stockpile of foreign exchange reserve, has increased its 2008 reserve to $1.95 trillion, an increase of $417.8 billion, but the increase was lower by $44.1 billion than in 2007. (See: China's forex growth slows falters for the fist time in a decade)

China is basically watching the situation in the US to take action depending on the situation and has therefore made various plans for quick implementation to keep their economy steady.

Zhou also accepted the fact that the policy could lead to swelling in total currency supply and lending.

"We have learned lessons from other countries that slow response to crisis leads to confidence dipping leading to delay in its restoration," he added.

However, the much anticipated stimulus package announcement from Chinese prime minister Wen Jiabao in his address to the National People's Congress proved unfounded. (See: Chinese stimulus package fails to materialize)

Zhang Ping, the country's chief economic planner in reply to a question on further stimulus package, said the government will boost investment depending on the economic data before taking a decision on whether further stimulus package is required.

"There were already signs of recovery which is beginning to take effect in consumption, investment and some product prices," said Zhang.

 China's top lending bank, Industrial and Commercial Bank of China (ICBC) reported an increase in total off-take of new loans in January to 252.1 billion yuan (US$36.9 billion), in response to the government efforts to boost the economy, 22 per cent of the amount for the whole of 2008. (See: China's ICBC reports rise in off-take of new loans in January)

The increase in new loans in January was "out of our expectation" and observed that moderate adjustment in the future could keep it in a reasonable range, said Zhou.