CHINA could undermine structural reforms if it adopts an excessively loose monetary policy, central bank governor Zhou Xiaochuan said Sunday, pledging to relax capital controls to help make the yuan currency fully convertible.

    Zhou also sought to soothe concerns over the impact of volatile capital flows on China’s economy, saying a war chest of foreign exchange reserves provides a buffer and the country has the capacity to deal with short-term speculative outflows.

    Zhou reiterated that the central bank still maintains its prudent monetary policy, despite recent cuts in interest rates and bank reserve requirement ratios.

    China’s central bank has maintained the policy since 2011, raising or cutting interest rates in line with shifts in the economy. But it has been stressing the need to fine-tune policy to support growth, which in 2014 recorded its slowest pace in 24 years, at 7.4 percent.

    “If we adopt excessively loose monetary policy, it will not be favorable for structural reforms,” Zhou told a conference in Beijing.

    Zhou said China was making steady progress towards making the yuan convertible on the capital account, although the International Monetary Fund does not require the yuan to be fully convertible to be included in its SDR, or special drawing rights, basket.

    To achieve that, China will take more steps this year to smooth the way for citizens to invest in overseas financial markets, and reform the Qualified Foreign Institutional Investors scheme, which is “not convenient and flexible enough.”

    Zhou added that China had the capacity to curb short-term capital outflows, after a recent wave of them amid jitters about the protracted economic slowdown and expectations for the U.S. Federal Reserve to raise interest rates this year.

    But the impact of capital flows on China’s economy would be “relatively small” due to its huge forex reserves, Zhou said.

    (SD-Agencies)