China prepares for worst case

China’s is considering a range of risks in its currency policy, including a worst-case scenario, the People’s Bank of China governor Yi Gang says.

As the yuan inches closer to the psychologically important level of seven per dollar, amid rising trade tensions with the US, Yi told Bloomberg the Chinese currency is at a “reasonable and equilibrium level.”

“The yuan’s volatility is normal. The currency has a flexible exchange rate mechanism, which ... shows two-way fluctuation,” Yi said on Sunday in Bali, Indonesia, on the sidelines of the IMF and World Bank meetings.

“For the full year, the yuan will stay in a reasonable range against the backdrop of an appreciating dollar,” he said.

Yi’s comments come days before US treasury secretary Steven Mnuchin is set to release a report in which he could label China as a currency manipulator, and as a trade dispute between the world’s two biggest economies shows no signs of abating. The tariff war is weighing on investor sentiment, prompting a sell-off in financial markets last week, undermining the outlook for global growth, which the IMF downgraded for the first time in two years.

Yi said he had “very good talks” with Mnuchin in Bali, without elaborating. In a key policy report in August, the People’s Bank of China referred to a “bottom-line mindset” in its currency policy. Yi explained that this means “we have to prepare for the rainy days.”.