November 23, 2017 / 7:35 AM / in a year

China adviser rejects criticism of forex management - paper

BEIJING, Nov 23 (Reuters) - China’s foreign exchange management has been effective and there has been limited impact on the economy from currency changes, a central bank adviser was quoted by an official newspaper as saying, in an apparent response to criticism from a parliament official.

The People’s Bank of China (PBOC) has been using various policy tools to limit the impact on monetary policy from foreign exchange flows, Sheng Songcheng was quoted by the China Securities Journal as saying.

“The problem of hijacking the creation of base money does not exist,” Sheng said in a speech late on Tuesday. The report was published on Wednesday.

Before June 2014 - when China’s forex reserves peaked due to capital inflows, the central bank had to buy the incoming foreign exchange to limit the yuan’s rises, but it consequently issued bills to offset the impact on money supply, Sheng said.

Analysts say regular interventions by the central bank to cap the yuan amount to creation of base money and can fuel inflation unless the central bank soaks up the excess yuan it had injected.

China’s economy may have suffered greatly from a surge in the yuan, if the central bank had not soaked up the incoming dollars and built up the reserves, Sheng said.

More recently, the central bank has been relying on its policy tools such as medium-term lending facility (MLF), standing lending facility (SLF) and reverse repurchase agreements to boost money supply, Sheng said, as it copes with money outflows.

China’s foreign exchange reserves dropped by nearly $1 trillion from $3.99 trillion between mid-2014 and January this year as it sought to shore up the yuan and reduce capital outflows, but have since edged up to $3.109 trillion in October.

Huang Qifan, deputy chairman of the economic and finance committee under the National People’s Congress, China’s largely rubber-stamp parliament, said last week the central bank’s foreign exchange management has “hijacked” its monetary policy.

Huang called for changes to how China manages its massive pile of foreign exchange reserves, saying the Ministry of Finance should play a key role in managing the reserves.

The reserves are primarily managed by the PBOC.

Huang also said China’s forex reserves can currently only be invested in liquid foreign debt, which generates low returns.

Sheng argued that the central bank has been diversifying its foreign exchange reserves investment away from U.S. debt.

“The main consideration of foreign exchange reserves management is not profitability, but safety and liquidity,” he said. (Reporting by Kevin Yao; Editing by Kim Coghill)

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