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China deputy central banker says does not want big yuan overshoot

April 14, 2016 5:49 PM EDT

A clerk of ICBC bank counts Chinese one hundred Yuan Banknotes as she poses for camera during a photo opportunity at its branch in Beijing, China, April 13, 2016. REUTERS/Kim Kyung-Hoon

WASHINGTON (Reuters) - China's central bank will not welcome a "severe" overshoot in the yuan's exchange rate, the deputy central bank governor said on Thursday as he voiced confidence that the world's second-largest economy would grow between 6.5 and 7.0 percent this year.

Yi Gang noted that China's economic outlook was not without challenges and that a failure to carry out structural reforms that addressed entrenched problems, such as an inflexible labor market and weak property rights, were crucial risks.

That said, Yi Gang thought the Chinese economy was fairly robust based on first-quarter economic data that included electricity consumption.

China is due to publish its first-quarter gross domestic product (GDP) report on April 15 and analysts forecast the economy to have grown 6.7 percent on an annual basis, easing slightly from 6.8 percent in the previous three months.

"I'm pretty confident that we are going to have between 6.5-7 pct growth this year," Yi said on the sidelines of the International Monetary Fund's (IMF) spring meetings in Washington, D.C. on Thursday.

Fears that a deeper-than-expected slowdown in the Chinese economy would drag on global economic growth have reverberated across financial markets in the past year.

The IMF has estimated that every one percentage point drop in China's GDP that is led by slowing domestic investment would cut growth for the entire Group of 20 nations by 0.25 percentage points.

YUAN CLARITY

Yi, who spoke for nearly an hour alongside former Federal Reserve Chairman Ben Bernanke, was pressed repeatedly by an audience seeking clarity on China's policy for the yuan , but Yi stressed that the market was the first determinant of the exchange rate.

However, in the same breath, he said the central bank would like to see stability in the yuan, and that authorities would strike a balancing act between pursuing its policy and allowing the market to trade the currency.

"We don't want to see an overshoot (in the yuan that is) severe," Yi said.

Earlier this year some investors were vexed by China's seemingly contradictory currency policy, when it appeared to guide the yuan lower by setting multi-year low midpoint rates, only to intervene the same day to support the currency, according to traders.

Acknowledging some of the market's frustrations over the direction of Chinese policy, David Lipton, first deputy managing director at the IMF, said on Thursday that "China understands the challenges that it faces in communications".

Despite taking a series of steps to relax its control of the yuan in recent years, China still keeps the currency on a tight leash. It sets an official midpoint for the yuan on every trading day, from which the currency can rise or fal1 2.0 percent.

A shock devaluation in the yuan in August last year, followed by further declines in the currency, also triggered worries that China was driving the yuan lower to lift its export growth and concerns that other governments may feel compelled to do the same.

To reduce investor focus on the yuan's exchange rate against the U.S. dollar, China began publishing a new yuan exchange rate against a basket of currencies in December.

Yi said the dollar still has a "very large weight" in the basket, but stressed the yuan is "referenced" against the basket as opposed to being pegged to it. Hence, the currency should not be expected to move in line with the index, he said.

With GDP growth at a 25-year low, China's government has repeatedly stressed that it can steer the economy away from a hard landing, while pursuing difficult reforms that would drive future activity.

Yet some have lamented that those promises have come to naught so far. Gao Xiqing, former president of China's sovereign wealth fund China Investment Corp. , also said on Thursday on the sidelines of the IMF meeting that China has not made any meaningful progress in reforming its state-owned companies.

(Reporting by Koh Gui Qing; Editing by David Chance, Andrea Ricci and Diane Craft)



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