Market now has brighter expectations, says bank chief as economic optimism continues to grow

Sound economic fundamentals and a promising outlook for the world's second-largest economy will help the yuan to naturally stabilize this year, senior officials with the central bank said recently.

Zhou Xiaochuan, head of the People's Bank of China, said the yuan is expected to remain at a basically stable level this year, thanks to achievements in supply-side structural reform and promising signs that have appeared since the fourth quarter of last year.

"The market now has brighter expectations for future economic trends," said Zhou, who spoke at a news conference on the sidelines of the annual session of the National People's Congress, the top legislature. "That will help put the exchange rate of the yuan on a trend to become more stable."

A prudent monetary policy that is expected to support supply-side structural reform and squeeze asset bubbles will also help sustain the good trend of economic growth this year, according to Yi Gang, vice-governor of the central bank.

As for short-term fluctuation, Zhou said there is no need to read too much into it. Short-term depreciation will not become long-lasting pain, he said.

Zhou's remarks come amid rising market expectations of a US interest rate hike this month, which have pulled up the dollar index recently.

Zhou refused to take the interest rate gap between China and the United States as a factor that will lead to long-term depreciation pressure on the yuan, saying a currency's exchange rate is determined by economic fundamentals.

Looking ahead, Yi said the central bank will allow the currency to fluctuate within a reasonable range while continuing to implement the exchange rate reform based on market-based principles.

Yi said China will also appropriately use foreign exchange reserves, which now stand at around $3 trillion, to help keep the yuan's exchange rate stable.

The central bank will also implement policies for regulating the foreign exchange market "in a more precise way" this year, but will not introduce new policies to put stricter controls on capital flows, according to Zhou.

Starting this year, the State Administration of Foreign Exchange has tightened oversight of outbound investment in the property, entertainment, sports and other sectors.

Wang Youxin, an economist with Bank of China, said such efforts will continue at least in the short run to further ease capital outflow pressures.

Strengthened efforts to ensure legitimate outbound investment have helped squeeze out some irrational outbound investment, according to Wang.