China's central bank governor: Constructive solutions are better than a trade war

Chinese central bank governor Yi Gang said on Sunday that the world should work together to seek constructive solutions to the trade frictions between the world's two biggest economies.

"We are sincere to show that we are willing to have a constructive solution. And a constructive solution is better than a trade war, which is lose-lose," Yi said this at a seminar on the sidelines of the annual International Monetary Fund (IMF) and World Bank meetings on the Indonesian island of Bali.

Yi said he had spoken to central bank governors and other top officials from a string of nations amid tit-for-tat US-China trade frictions. And he largely agrees with the IMF's assessment on how an escalating trade war could impact the global economy. "Trade tensions... cause negative expectations, and uncertainties," Yi said, adding that "There are tremendous uncertainties ahead of us."

He also believes that a rule-based multilateral system has been successful. "Globalization, comparative advantage, and free trade are all effective," he said. "We will continue to follow this principle."

"We are also preparing for the worst. However, even if we are ready for this, we sincerely hope to find a constructive solution. This is not only for our consideration, but also for our neighbors, the supply chains and global interests."

Plenty of room for monetary adjustments

The governor said he still sees plenty of room for interest rate and reserve requirement ratio (RRR) adjustments.

"We still have plenty of monetary policy instruments in terms of interest rate policy, in terms of RRR. We have plenty of room for adjustment, just in case we need it." 

He believed that China's monetary stance was still basically neutral, without an easing or tightening bias, adding that the amount of liquidity pumped into the market was appropriate to stabilize leverage.

"Our overall leverage has been stabilized, so that is an achievement. The recent decrease of RRR or other monetary instruments is basically to supply adequate liquidity," he said.

China's central bank announced last Sunday that it lowered the RRR for certain banks by one percentage point, effectively pumping 1.2 trillion yuan (174.7 billion US dollars) into the world's second largest economy. 

 China's economic growth would comfortably reach target

Yi said China's economic growth would still comfortably reach its full-year target of around 6.5 percent in 2018 with the possibility of overshooting, adding that he was comfortable with current inflation levels.

Yi expected China's consumer price inflation to come in at around two percent for the year, with producer price inflation falling to a range of three to four percent.

Cross-border capital flows have been normal, he added, while China's economy has shifted away from exports to become more domestically driven.

Yi Gang on Saturday promised to keep the yuan currency's value broadly stable. "China will continue to let the market play a decisive role in the formation of the yuan exchange rate," Yi said in a statement.

"We will not engage in competitive devaluation, and will not use the exchange rate as a tool to deal with trade frictions."

Yi also vowed that China would do its part by getting tougher on domestic copyright violators and opening up the financial services sector.