China central bank official defends rapid foreign reserves use to keep yuan steady

BEIJING (Reuters) - A senior official at China’s central bank has defended authorities’ rapid use of foreign exchange reserves to keep the yuan currency stable, saying the benefits “outweighed the drawbacks”, according to a state newspaper.

A man uses his mobile phone while walking past the headquarters of the People's Bank of China (PBOC), the central bank, in Beijing, November 20, 2013. REUTERS/Jason Lee/File Photo

“The use of foreign reserves has kept the yuan stable and prevented market overshooting,” the Ren Min Zheng Xie Bao

paper quoted Yi Gang, a vice governor of the People’s Bank of China (PBOC), as saying.

The paper is owned by political advisory body the China’s People’s Political Consultative Conference (CPPCC), of which Yi is a member.

The yuan CNY=CFXS fell 6.6 percent against the dollar last year, its biggest loss since 1994, under pressure from sluggish economic growth and a strong dollar, which have spurred capital outflows.

China has spent $1 trillion in foreign reserves in the past two years as it tried to stabilize the faltering currency, the newspaper said.

China’s foreign reserves shrank to near six-year lows in December, but held just above the critical $3 trillion level, sparking speculation over how long authorities would be able to continue defending the currency.

The government has turned to other administrative and regulatory measures in recent weeks to curb outflows and clamp down on speculation.

Yu said the yuan’s inclusion in the International Monetary Fund’s basket of reserve currencies known as Special Drawing Rights, or SDR, has brought “profound changes” for the currency, as the yuan has become more internationalized and can be held as official reserve currency by other countries.

“We must realize the situation that yuan currently faces has changed profoundly compared to the past, before we could discuss what an appropriate level is for foreign reserves,” Yi said.

Reporting by Kevin Yao and Yawen Chen; Editing by Clarence Fernandez and Kim Coghill