PBOC Hints at Near-Term Loosening

A week after Premier Wen Jiabao opened the National People’s Congress by lowering China’s 2012 GDP growth target, and only a couple days after China announced its largest trade deficit in more than a decade, People’s Bank of China (PBOC) Governor Zhou Xiaochuan claimed that China has enough slack to further ease its monetary policy. From Reuters:
“There is a pretty big room for RRR cuts,” Zhou said at an annual press conference, referring to bank’s reserve requirement ratio.
“The RRR is just over 20 percent now. We had a low RRR of 6 percent in the late 1990s, even lower than that in some countries.”
But Zhou said future RRR moves will depend on the overall liquidity in financial markets, as determined by China’s balance of payments and total foreign currency purchases by the central bank and Chinese commercial banks.
“The biggest uncertainty in the international economy is, as we all know, the recovery, and especially with regards to Europe’s economy and the euro sovereign debt crisis,” Zhou said.
Zhou also touched on the subject of renminbi appreciation at the annual news briefing, where The Wall Street Journal reports he made the case for further appreciation:
The trade figures and currency valuation are linked economically and politically. Economists often judge whether a currency is undervalued by gauging the size of the trade surplus, and how much a currency would have to gain in value to eliminate or sharply scale back that surplus. Politically, exporters and their allies fight harder against appreciation, which makes exports more expensive as the trade surplus narrows.
The yuan has depreciated roughly 0.5% against the dollar since the beginning of 2012, after gaining 4.7% last year.
While bank analysts have argued that China’s currency was likely to increase in value this year, though at a

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