China ‘faces risks on US trade tariffs’

China central bank governor Yi Gang said on Sunday he still sees room for adjustment in interest rates and the reserve requirement ratio (RRR), as downside risks from trade tensions with the US remain significant.

China faces “tremendous uncertainties” due to the effects of tariffs and trade friction and is seeking a “constructive solution” to the current trade tensions, Yi said at a seminar on the sidelines of the annual IMF and World Bank meetings in Bali.

“We still have plenty of monetary policy instruments in terms of interest rate policy, in terms of RRR. We have plenty of room for adjustment, just in case we need it,” Yi said.

Beijing and Washington have slapped tit-for-tat tariffs on each other and plans for bilateral trade talks to resolve the dispute have stalled, triggering a market rout and putting pressure on China’s already softening economy and weakening currency.

Yi said China’s economic growth would still comfortably reach its full-year target of 6.5% in 2018 with possible overshooting, adding he was comfortable with inflation levels.

China has implemented four RRR cuts in 2018, releasing billions in new liquidity, and used other tools to push down corporate lending rates, but Yi said trade tensions with the US could hit the economy further.

“I think the downside risks from trade tensions are significant,” he said. “Tremendous uncertainties [are] ahead of us.”

China’s monetary stance was still neutral, without an easing or tightening bias, Yi said. He believed the amount of liquidity pumped into the market was appropriate to stabilise leverage.

The central bank was preparing for a range of risks in its currency policy, including a worst-case scenario. But Yi said the currency was at a “reasonable and equilibrium level”.

China has sought to reduce its enormous debt pile, with a state-led crackdown on shadow banking and excessive lending to unproductive sectors.

“Our overall leverage has been stabilised, so that is an achievement. The recent decrease of RRR or other monetary instruments is basically to supply adequate liquidity.”

Yi expected China’s consumer price inflation to come in at around 2%, with producer price inflation falling to 3%-4%.

Cross-border capital flows had been normal, he added, while China’s economy has shifted from exports to become more domestically driven.

China’s current account could turn positive this year with “a bit” of a surplus, even though it would still account for less than 1% of GDP, Yi said.

Meanwhile, China was seeking a constructive solution to the trade row, while speeding up reforms to strengthen intellectual property right protection and “significantly” opening up financial services.