China says needs to avoid external shocks this year

Chinese Yuan banknotes are seen in this illustration taken February 10, 2020. REUTERS Dado Ruvic Illustration File Photo

SHANGHAI, Jan 21, Reuters - China must prevent external shocks this year while strengthening macro-prudential management and guiding market expectations, the country's foreign exchange regulator said on Friday.

The U.S Federal Reserve is expected to hike interest rates as early as March, while its Chinese counterpart has stepped up monetary easing to prop up a slowing economy, raising concerns about capital outflows due to policy divergence.

During the previous round of Fed tightening in 2018, China's currency depreciated sharply.

This round of tightening by the Federal Reserve may have less spillover effects than the previous round, Wang Chunying, a spokeswoman for the State Administration of Foreign Exchange SAFE, said at a news conference on Friday.

On Wednesday, Chinese government bond yields fell across the curve after an official said that the country's benchmark lending rate will be cut as early as this week to shore up the cooling economy. Wang said that both cross-border loans and capital flows related to trade financing are relatively stable in the face of this round of Fed tightening expectations.

The regulators said that China should better deal with changes in the external environment due to robust export growth, ample FX liquidity and attractiveness of Chinese assets.

The yuan was the best performing emerging market currency in 2021, appreciating 2.7% against a rising dollar. Its gains have been extended into 2022, with a 0.2% advance year-to-date.

The current account surplus to GDP ratio for 2021 was tentatively estimated to be within 2%, Wang said.