China central bank: speculators should not dominate sentiment

Zhou Xiaochuan, Governor of the People's Bank of China speaks at the Volatility as the New Normal event in the Swiss mountain resort of Davos January 21, 2015. REUTERS/Ruben Sprich

BEIJING (Reuters) - Speculators should not be allowed to dominate market sentiment regarding China’s foreign exchange reserves and it was quite normal for reserves to fall as well as rise, central bank governor Zhou Xiaochuan was quoted as saying on Saturday.

China’s foreign reserves fell for a third straight month in January, as the central bank dumped dollars to defend the yuan and prevent an increase in capital outflows.

In an interview carried in the Chinese financial magazine Caixin, Zhou said yuan exchange reform would help the market be more flexible in dealing with speculative forces.

There was a need to distinguish capital outflows from capital flight, and tight capital controls would not be effective for China, he said. China has not fully liberalized its capital account.

Zhou added that there was no basis for the yuan to keep depreciating, and China would keep the yuan basically stable versus a basket of currencies while allowing greater volatility against the U.S. dollar.

The government also needed to prevent systemic risks in the economy, and prevent “cross infection” between the stock, debt and currency markets, he said.

The comments come after China reported economic growth of 6.9 percent for 2015, its weakest in 25 years, while depreciation pressure on the yuan adds to the case for the central bank to take more economic stimulus measures over the near-term.

A slew of economic indicators has sent mixed signals to markets at the start of 2016 over the health of China’s economy.

Activity in the services sector expanded at its fastest pace in six months in January, a private survey showed on Feb. 3, while manufacturing activity fell to the lowest since August 2012.

Reporting by Ben Blanchard, Judy Hua and Kevin Yao; Editing by Richard Pullin