Caixin
Dec 16, 2016 07:43 PM
ECONOMY

Government Vows More 'Flexibility' of Yuan to Maintain Its Stability

(Beijing) — "Stability" was the key word as China's top leaders on Friday wrapped up an annual meeting to set out economic targets and policy priorities for next year.

The government will "increase the flexibility" of the Chinese currency and "maintain the broad stability of the RMB exchange rate at a reasonable equilibrium level," the official Xinhua News Agency said, citing a statement from the three-day Central Economic Work Conference.

The yuan, which has weakened sharply this year and fueled the outflow of capital from the country, has been placed under even more depreciation pressure after the U.S. Federal Reserve raised interest rates this week and suggested that it will accelerate the pace of hikes in coming years.

Beijing has been shedding holdings of U.S. Treasury bonds to support the yuan's value. The stockpile declined for the fifth consecutive month in October to $1.116 trillion, the lowest since July 2010, according to latest data from the U.S. Treasury Department and Wind.

China has also taken a series of measures to stem capital outflows, including imposing more restrictions on overseas investment.

Chinese leaders at the meeting this week said they will elevate defending against financial risks "to an even more important position" and pledged to step up efforts to "prevent and curb asset bubbles," Xinhua said.

In an apparent nod to excessive home price increases this year, authorities vowed to "rationally increase land supply" in some cities and use financial and other measures to rein in real estate bubbles. They also said they will guard against large price volatility and "strictly limit credit used for speculative property purchases," the report said.

The government will keep monetary policy "stable and neutral" to properly adjust money supply and "maintain the basic stability of liquidity," it said, seemingly addressing concerns over rising actual interest rates in the country, particularly in the bond and money markets.

Fiscal policy will be "more active and effective" next year. At the top of the government agenda will be spending to facilitate supply-side reforms, a reduction in corporate taxes and more support of basic social security expenditures.

China has been hoping to make its growth more sustainable through supply-side reforms, which were put forward for the first time by President Xi Jinping in November 2015. These mainly involve reducing overcapacity, such as in the steel and coal industries, cutting inventory and reducing debt levels.

The government has set a goal of cleaning up so-called zombie companies owned by the state by 2020. This is expected to cost many people their current jobs and needs huge amount of official spending for compensation.

Xinhua added that at the meeting, China's leaders also decided to make breakthroughs in the mixed-ownership reform of state-owned enterprises (SOEs), with "substantial steps" to be made in the electricity, oil, natural gas, railway, civil aviation, telecommunication and military industries.

Mixed-ownership reform of SOEs is seen as a way to introduce private capital into the clumsy and inefficient sector to make it more competitive.

Contact Fran Wang (fangwang@caixin.com)

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