The global economy has yet to find its feet, with the U.S. recovery slowing and imbalances within the eurozone worsening, a Chinese central banker said in comments published on Friday.
In unusually candid remarks, Li Dongrong, an assistant governor of the People's Bank of China, also warned that a continuation of ultra-loose policies in rich countries might unleash a flood of capital inflows into emerging economies.
Against the background of a fragile global recovery, he said that China could not waver from its long-term plan to boost the yuan's international clout.
He offered a glum assessment of the state of the global economy in the speech published on the central bank's website (www.pbc.gov.cn).
"The foundations of the recovery are still not solid," Li said at a meeting with members of the Association of Southeast Asian Nations (ASEAN) earlier this week in southern China.
"Recently, the U.S. economic recovery has slowed and the effects of the government's stimulus policy have been unclear," he said.
Although European sovereign debt worries had eased somewhat, there was still no fundamental solution, he said, adding that imbalances in the eurozone were becoming more severe as Germany powered ahead while countries in southern Europe struggled.
Japan's economic growth was also faltering, he noted.
"When the yen was recently facing heavy appreciation pressure, the Japanese central bank had no choice but to use 2 trillion yen ($24.6 billion) to intervene in its exchange rate," he said in the first version of the speech published on the website.
A later version did not contain the reference to Japan's intervention on Sept 15.
Extremely loose monetary policies in the United States and Japan were presenting a sharp challenge to developing countries that are growing faster, he said.
"Emerging markets will together face quite large capital inflows as well as currency appreciation and inflationary pressures," he said.
YUAN GOING GLOBAL
Beijing supported the greater use of bilateral currency swaps to facilitate the expansion of the yuan's role, Li said.
"We will continue to sign currency swap agreements with relevant countries in line with demands to support the use of the yuan in cross-border trade and direct investment," he said.
Since the global financial crisis in late 2008, China has launched a steady stream of policy initiatives along the path of making the yuan an internationally accepted currency for trade settlement to reduce reliance on the dollar.
China has signed currency swap deals with a handful of countries, including South Korea, Malaysia and Argentina, and this year said that it would allow all foreign trade partners to conduct their deals in yuan.
Separately, a former policy adviser to the PBOC said that keeping the yuan relatively stable will be crucial for China's drive to gradually internationalize the currency.
Bolstering the yuan's usage in international trade remained the near-term focus in the ongoing program to increase the yuan's global influence, said Li Yang, vice head of the Chinese Academy of Social Sciences, a top government think-tank.
"China should not only encourage financial institutions to expand trade financing but also create a stable international environment for the internationalization process by keeping the yuan's exchange rate relatively stable," Li said in an article published in the Chinese-language Studies of International Finance magazine.
Li's comments on the yuan echoed the official strategy of gradually expanding the yuan's use abroad while carefully managing its value versus the dollar at the same time.
Financial reforms to develop the yuan-denominated debt market would help boost its attractiveness and achieve the long-term goal of making it a global reserve currency, Li said.
"Up to now, the yuan has limited reserve functions and has yet to become an 'anchor' for other currencies," he added.
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