A senior advisor to the People’s Bank of China has defended its forex management practices following heavy censure from a member of the Chinese legislative congress.
Huang Qifan, deputy chairman of the economic and finance committee of China’s National People’s Congress, made the accusation last week that PBOC’s management of foreign exchange had “hijacked” monetary policy.
According to Reuters Huang called for China to overhaul management of its over USD$3 trillion in foreign reserves, by diminishing PBOC’s dominance and giving the Ministry of Finance great sway.
Huang criticised the restriction on investment of China’s forex reserves to high liquidity foreign debt characterised by low returns.
The congressional member is far from the only critic of PBOC’s forex management, with analysts saying that its interventions to contain increases in the yuan are expanding the base money supply and driving inflation.
Sheng Songsheng, a senior advisor to PBOC, has defended the central bank’s forex management practices, declaring in a speech earlier this week that “the problem of hijacking the creation of base money does not exist.”
According to Sheng the central bank has had to absorb an influx of dollars and expand reserves in order to prevent appreciation of the yuan which could have hampered the Chinese economy.
While China shed nearly $1 trillion in foreign reserves by the start of the year from a peak of $3.99 trillion in mid-2014, following Beijing’s efforts to staunch capital outflows and bolster the yuan, its overseas currency coffers have since bulked back up again, rising to $3.109 trillion in October.
Sheng also pointed to the broad range of policy instruments that the central bank has currently employs to adjust money supply as foreign funds pour in, including medium-term lending facilities (MLF), standing lending facilities (SLF) and reverse repo agreements.
A recent report by Moody’s has hailed PBOC’s deployment of a broader range of longer-tenure instruments to management money supply, saying that it permits more nuanced adjustments that preserve the broader thrust of monetary policy without impacting the market.
With respect to Huang Qifan’s criticism of PBOC’s investment decisions, Sheng said that while China had diversified its portfolio away from US debt, earning high returns was not the chief priority when it came to forex management.
“The main consideration of foreign exchange reserves management is not profitability, but safety and liquidity.