China Central Bank Official: We Were Wronged

China's devaluation of its yuan currency should not be made a scapegoat for the recent global stock market rout, a senior Chinese central bank official told Reuters on Thursday.

Instead, Yao Yudong, head of the bank's Research Institute of Finance and Banking, said concerns over a possible U.S. interest rate rise this year may have fueled capital flight out of emerging markets.

He said the U.S. Federal Reserve should delay any rate hike to give fragile emerging market economies time to prepare.

"China's exchange rate reform had nothing to do with the global stock market volatility, it was mainly due to the upcoming U.S. Federal Reserve monetary policy move," Yao said.

"We were wronged."

Yao's comments, which came on the same day that state media issued a number of commentaries defending China's policy making, show Beijing's sensitivity to suggestions it may have fumbled economic policy. The ruling Communist Party has drawn much of its legitimacy in past decades from fostering economic growth and raising incomes, and wants to be seen as a responsible player in the global economy.

Yao said China's economy remains on a sound footing, though some emerging market economies face a possible financial crisis in the years ahead stemming from liquidity stresses if the U.S. raises interest rates.

"So we hope the Federal Reserve could further delay its interest rate rise, giving emerging markets ample time to prepare. The Fed should not only consider the U.S. economy, but should also consider the global economy which is very fragile," he said in an exclusive interview.

Policy insiders have told Reuters that China has been so surprised by the global reaction to its yuan devaluation that it's likely to keep the currency on a tight leash in the near-term to head off any currency war that could spark a broader financial crisis.

Yao said the yuan is likely to see two-way moves in the near term and may resume its appreciation over time. "The (yuan) exchange rate will be basically stable with two-way volatility. We cannot rule out the possibility of yuan appreciation after 2-3 years."

STILL ON TRACK FOR 7 PCT ANNUAL GROWTH

The surprise yuan devaluation - of nearly 2 percent on Aug. 11 - stoked global concerns about slowing growth in the world's second-biggest economy, coming just days after poor trade data.

But Yao shrugged off concerns about a possible 'hard landing' in China, saying growth was still underpinned by more resilient services and consumption. "China's economy is in good shape. I'm very confident full-year growth will reach 7 percent," he said.

Many economists fear China may miss its 7 percent annual growth target as recent data showed the economy, which officially grew at 7 percent in the first half, has lost steam.

A U.S. rate increase next month now seems less appropriate given the threat to the U.S. economy from the recent market turmoil, an influential Fed official said on Wednesday in the clearest sign that fears of a Chinese slowdown are influencing U.S. monetary policy.

China has plenty of policy room to cope with expected liquidity strains following any U.S. rate rise, Yao said, though he did not explain why he still urged the Fed to delay any move.

"China has sufficient policy room and adequate policy tools to respond," he said.

The People's Bank of China (PBOC) cut interest rates on Tuesday and lowered the amount of reserves that banks must hold for the second time in two months, ratcheting up support for a stumbling economy and a plunging stock market.

The yuan's inclusion in the International Monetary Fund's currency basket, known as Special Drawing Rights (SDR), will help ease a shortage of liquidity globally, but may not happen for another 20 years due to China's sustained current account surplus, Yao said.

"China's high savings rate means China cannot provide liquidity to the world via the current account right now," he said. (Reporting by Kevin Yao; Editing by Ian Geoghegan)