China cbank: interest rates key in inflation fight

BEIJING, (Reuters) - China’s central bank governor, Zhou Xiaochuan, held an annual press conference on Friday outlining his views on the challenges ahead for the world’s second-largest economy.

 Below are the highlights from the conference, which was held in conjunction with the nation’s yearly parliament session:

INTEREST RATES A KEY POLICY TOOL

 “After the national economy’s successful recovery from the international financial crisis, there has been some pick-up in inflation.

 “In these circumstances, interest rate policy is certainly an important tool that has to be applied. Any fiscal policy tool may have negative consequences, such as, as you mentioned, expanding inflows of capital.

 “Interest rate policy is currently a focus that has to be applied.”

FX NOT KEY TO CURBING PRICES

 “China is a very large economy with a big population and so we can say that although exchange rate adjustments may have some impact on domestic prices, relative to smaller open economies, the impact is not so large.

 “So among the policy tools for dealing with inflation, the most important means don’t especially focus on exchange rates as a tool.

 “So I think our exchange rate policy and exchange rate reforms will still adhere to the three points, among which is gradualism. So we’ll stick to a gradual approach to exchange rate reform and strengthening the flexibility of exchange rates.”

LIQUIDITY CONTROLS

 “We will guard the gate of liquidity and guide reasonable growth in money and credit and maintain reasonable scale in aggregate financing.

 “We will use price and quantitative tools such as interest rates, banks’ reserve requirements and open market operations to maintain appropriate liquidity in the banking system. And implement the dynamic differentiated reserve requirement ratios to guide steady growth in money and credit.”

GROWTH OUTLOOK

 “The global economy continues its recovery momentum but there are many unstable, uncertain factors in the course of the recovery.

 “Domestically, the economy maintains relatively rapid growth and there are conditions for sustained development, but there are also many difficulties and problems.”

POLICY FOCUS

 “Monetary policy is chiefly focused on economic growth,  employment, inflation and the international balance of payments.

 “These policies will also influence asset prices – that impact is quite complex. Some tools can be applied directly to have an impact on asset prices, but most tools have an indirect impact.”

China’s bank chief ‘very confident’ in eurozone

BEIJING, (AFP) - The head of China’s central bank, Zhou Xiaochuan, on Friday expressed confidence in the eurozone and said Beijing would support countries struggling to overcome their massive debt woes.

“China is very confident about the eurozone,” Zhou told a news conference on the sidelines of the country’s annual session of parliament.

“Despite some difficulties in some European countries, China still strongly supports these countries in overcoming their fiscal difficulties and achieving economic recovery.”The governor of the People’s Bank of China added: “We are confident about their economic prospects.”Beijing has the world’s largest foreign exchange reserves at $2.847 trillion as of the end of 2010. A large chunk -- $1.16 trillion -- is parked in low-yielding US Treasuries but a growing portion is invested in euro-denominated assets.

In January, PBoC vice governor Yi Gang said European financial markets would remain “one of the most important investment areas for China’s foreign exchange reserves”.Since December, China has pledged to buy government bonds from struggling Spain, Greece and Portugal, but no concrete commitments on the size of those investments have been revealed.

Saddled with heavy debt and huge public deficits, several eurozone countries have been forced to offer higher interest rates to attract investors to their sovereign bonds.

Leaders of the 17 eurozone countries plus the head of the European Central Bank, Jean-Claude Trichet, are to meet in Brussels on Friday to discuss the ongoing debt crisis.