China wants 'constructive’ solution to trade war, Yi says

Blurred lights in front of government building in Beijing China

October 14, 2018 - China’s central bank Governor Yi Gang said the nation is seeking to solve trade tensions with the U.S. constructively and will continue to open up its services industry, especially the finance sector.

The risks from the trade conflict are “significant,” hurting global growth and causing uncertainty in financial markets, Yi said at a Group of 30 international banking seminar held on the sidelines of the International Monetary Fund and World Bank’s annual meetings in Bali on Sunday.

“The trade tensions have been a problem because it causes negative expectations, it creates uncertainties so people are nervous,” he said. “There are tremendous uncertainties ahead of us.”

While China’s economy is still showing steady growth—with data next week likely to show expansion of 6.6 percent in the third quarter—the tariff war has damped investor sentiment, driving the Chinese currency down more than 9 percent against the dollar in the past six months and pushing the nation’s benchmark stock index into bear market.

Yi said on Sunday’s panel the dispute will not only hurt China but also its major trading partners, and a constructive solution is better than a trade war, which is a “lose-lose situation.”

Current Account

Nevertheless, China is preparing for a protracted conflict, he said.

“We prepare for the worst. You see a lot of people in China now are preparing for the trade tension to be a prolonged situation,” the governor said. “We have a very sincere view that we should seek a constructive solution—not only for us, but our neighbors in the supply chain and for the world.”

He said China will “follow our principles” when negotiating with the U.S., responding to a question from Mexico’s ex-president Ernesto Zedillo on what the government has learned from the recent trade agreement between the U.S., Canada and Mexico.

Yi said China’s current-account surplus has been narrowing over the years and will likely drop below 1 percent of gross domestic product this year. There are parts of trade between China and the U.S. that aren’t being reflected in the data, such as U.S. subsidiary companies that produce and sell in China, he said.

He reiterated that China will step up reforms and open up its economy further, while working to improve the protection of intellectual property rights.

On monetary policy, the governor said the stance is prudent with a neutral bias, and the central bank has plenty of room to adjust policy if needed.

“Right now, the interest-rate level is appropriate,” he said. “Given that the United States Federal Reserve is hiking their rate, I would say the interest rate level in China is more or less comfortable and appropriate. We have plenty of tools that we can utilize to deal with uncertainty,” he said, citing the reserve requirement ratios for lenders, monetary conditions and a flexible exchange rate.

In a statement to the International Monetary and Financial Committee, Yi said China won’t use the currency as a tool to deal with the trade conflicts, with authorities continuing to let the market determine the exchange rate.

Source: Bloomberg