In a statement posted on the website of China's central bank, Governor Yi Gang said Tuesday that China has been closely watching recent volatility in the foreign exchange market and will "keep the yuan exchange rate basically stable at a reasonable and balanced level."
Volatility has returned to Chinese financial markets amid concerns that a tariff spat between China and the US could spiral into a full-blown trade war. Although China's economic fundamentals are still robust, it's time for the country to focus more on defusing financial risks to maintain economic calm.
In recent weeks, Asian stock markets posted widespread declines amid rising trade tensions, while currencies weakened dramatically in emerging markets. It is normal to see financial market fluctuations amid a stronger dollar and renewed concerns about external uncertainties. As trade-war tensions mount, preventing financial risks is one of the toughest battles emerging markets have to win to maintain economic stability. In China, there are growing risks for the financial sector, particularly from external sources. The current situation is one of the severest in recent years. China needs to show its determination like it did in 2015, when Chinese stocks experienced a conspicuous correction, to safeguard financial stability.
One very important thing is for China to think about how to boost the confidence of Chinese investors. The current volatility in China's financial markets reflects that investor confidence has been hammered by trade war fears and remains at a very low level. The government may need to roll out measures to rule out external attacks against Chinese financial sectors and strengthen communication with the market to stabilize expectations. Amid rising trade war fears, effective communication between policymakers and the financial market could help avoid public panic and foster greater social and economic endurance for external attacks.
With an unstable external environment, continuous efforts are needed to check hidden dangers in China's financial system. Chinese policymakers have recently emphasized deleveraging and reining in market speculation as part of efforts to defuse financial risks.
With a steadily improving macroeconomic situation, the Chinese economy remains resilient to external attacks. The recent volatility in the financial market won't evolve into a systemic financial crisis, but it reminds us to increase risk awareness and fine-tune economic policies as needed.