Q: How does China view the monetary policy normalization of major economies?
A: We are implementing a prudent and neutral monetary policy, and we have not adopted quantitative easing or zero-interest rate policies. We have long anticipated the changes associated with balance sheet unwinding by central banks of major economies, and are fully prepared. At the moment, with the yield of China’s ten-year government bond around 3.7% and that of the US around 2.8%, the China-US interest rate differential is within a comfortable range. The differentials of money market interest rates such as overnight interest rate and seven-day interest rate between the two countries are also within comfortable ranges. In short, we are prepared for the monetary policy normalization of major economies.
Q: Is China considering a benchmark rate hike?
A: China is continuing the market-based interest rate reform. In some aspects, the interest rates are “running on two tracks”, that is, there are benchmark interest rates for deposits and loans, while the money market rates are fully liberalized. We have eased restrictions on deposit and loan rates, and commercial banks have been offering deposit and loan rates higher or lower than the benchmark interest rate based on their operating conditions. As a matter of fact, the best tactics is for us to gradually unify the two tracks of interest rates, and we are doing just that in the market-based reforms.
Q: With greater openness of the financial sector, will foreign institutions have an impact on domestic ones? In the next few years, will the domestic financial market experience drastic changes?
A: As we open up , we welcome foreign financial institutions to invest and operate in China and will treat domestic funded and foreign funded institutions as equals. Whether foreign institutions make strong competitors will depend on their financial conditions, governance structure and other factors. By raising the foreign ownership cap, we are providing opportunities to open up niche markets. Though there are relevant laws and regulations in each market, our principles are clear, to treat domestic and foreign capital equally under the current prudential regulation system. I believe that, in the next few years, the Chinese market will be more competitive, and the financial sector will have stronger capacities to better serve the real economy on a level playing field. By that time, the regulatory environment will also be improved and the financial security enhanced.
Q: What do you think of the rapid increase of China’s debt to GDP ratio?
A: China is indeed faced with the problems of high leverage ratios and piling debts. From the perspective of prudent monetary policy and financial stability, the primary task is to keep the debt level stable; the second is to further optimize debt structure and strike a balance in government, corporate and household debts; and the third is to have a more reasonable macro leverage rate ratio. We are doing these to achieve a beautiful deleveraging.
Q: What’s your view on China-US trade frictions?
A: The trade imbalance between China and the US, the two largest economies in the world, is a complex issue. Here are some of my observations. Firstly, it is a structural problem and related to China’s position in the Asian value chain. Chinese enterprises import spare parts from Japan, Korea and Taiwan Province, and assemble them into finished products and export to the US. Thus, our bilateral surplus with the US reflects the surplus that the value chain in East Asia has with the US. Therefore, a multilateral perspective is needed to look at the trade balance issue. Secondly, it is a macro problem. On the left of the national account equation is current account balance; and on the right are government deficit, investment and private savings. In the US case, the fiscal deficit is expanding. The bigger the fiscal deficit, the bigger the current account deficit. Meanwhile, as investment grows and saving rate declines, the current account deficit will expand too. Thus, it’s rather difficult to fix the problem of US trade deficit. Thirdly, when it comes to trade, we should not only look at trade of goods, but that of services. Due to comparative advantages of the US in service trade, China’s deficit with the US in service trade has increased rapidly, growing 20% per annum on average in the past decade and more. In 2017, the deficit exceeded USD 38 billion. As China further opens the financial sector, the US can better leverage its comparative advantages. With the trade in goods and services combined, the two countries will have a more balanced trade relationship. Lastly, let’s do not forget the US multinational companies. Through commercial presence in China, they have sold lots of products in China and reaped high profits which are not included in the trade figure. After taking this into consideration, we may have a more comprehensive picture. To sum up, China-US trade imbalance is a structural and long-term issue that requires careful analysis and rational handling.
Q: Will China use monetary policy measures to respond to problems in China-US trade?
A: China’s monetary policy is based on comprehensive considerations of domestic economic conditions, and aims at serving the real economy. Our monetary policy, as well as our foreign exchange market, is functioning very well. We have adopted a managed floating exchange rate regime based on market demand and supply with reference to a basket of currencies. The PBC has not intervened in foreign exchange market for quite a long time. As it stands now, the foreign exchange market not only serve individuals and businesses well, but also facilitates domestic and foreign trade and investment with greater convenience. I believe it will do even better in the future.
Q: What benefits will monetary policy normalization and financial sector opening-up bring to China’s real economy? How will China’s banking sector enhance its international competitiveness?
A: The normalization of monetary policy and opening of the financial sector are definitely beneficial to the real economy. All our measures and polices are designed for the financial sector to better serve the real economy. They will help raise the competitiveness of Chinese banks both at home and abroad.
Q: Last September, the PBC tightened regulation over virtual currencies and banned ICOs and all virtual currency exchanges. Will the PBC introduce new measures this year? And what’s its view on the block chain?
A: We do believe that the virtual currency contributes little to the real economy, and speculative activities and even money-laundering behaviors are involved. So the PBC has been cautious about virtual currencies. However, when it comes to the study of digital currencies, China is actually leading the world. We are doing research on digital currency, block chain and Fintech to explore better ways for them to serve the real economy, to develop these technologies safely and avoid potential negative impacts. Overall, we have very strict regulation over virtual currencies. At the same time, we are also exploring how to tap the strength of digital currencies to better serve the real economy.
Q: Will “liquidity trap” affect China?
A: Simply put, China is quite far away from the “liquidity trap”. Nevertheless, this kind of extreme scenario can provide a useful food for thought in the making of monetary policy.
Q: Will China adopt new measures in capital account convertability? What’s the next step in advancing RMB internationalization? As the financial industry further opens up, how will the regulatory model evolve? Will it move towards integrated regulation?
A: We’ve been steadily promoting capital account convertability. In terms of facilitating foreign direct investment (FDI) and outbound direct investment (ODI), bringing foreign capital into the domestic equity and stock market, and including Chinese stocks into major global indices, we’ve been working on these fronts. A recent example is the newly announced measure of raising the daily quota for Shanghai-bound and Shenzhen-bound investment, and Hong Kong-bound investment in the Shanghai-Hong Kong Connect and Shenzhen-Hong Kong Connect programs. We are taking a progressive and orderly approach in capital account convertability to increase the convenience of capital account transactions. Our progressive reform also stresses on risk control. RMB internationalization is a natural, market-driven process. Wider global acceptance of RMB can help reduce transaction costs, and mitigate the risk of currency mismatch. If the enterprises and financial institutions have this kind of demand, we will be happy to facilitate the outcome. However, it will be mainly driven by market. We will level the playing field for the RMB, US dollar, Japanese yen, and euro, and let enterprises freely choose which currency to use. As for regulation, we will undoubtedly strengthen regulation under the basic framework of sector-specific regulation with clearly defined responsibilities for each regulatory agency. However, based on the experience over the past years, we need to heed risk contagion among different markets, products and institutions. In this regard, the upcoming Guidelines on Regulating Financial Institutions’ Asset Management Business aim to apply the same set of rules to banks, securities firms and insurance companies in their asset management businesses to minimize regulatory arbitrage.
Q: What’s the significance of establishing the China Nets Union Clearing Corporation?
A: The major consideration of establishing China Nets Union Clearing Corporation is to safeguard fair competition and the operation security of payment systems. China leads the world in third-party payment businesses such as mobile payment. The convenience of mobile payment in China is well-known around the world. However, there are risks in its development. It’s a challenging task to encourage competition and innovation while preventing risks effectively. We need to strike a good balance, and that’s the aim of our institutional design.
Q: We notice that now the PBC resorts more to open market operations to adjust market liquidity and interest rate adjustment seems to assume a signaling nature. Does that mean a gradual shift from a dual-track interest rate system to market-based adjustment of interest rates? Since the Fed’s rate hike is expected, will China follow suit? Does the hike of mortgage interest rates last year represent an interest rate hike in disguise? Will the mortgage rate rise again?
A: As I said, China’s monetary policy has been prudent. Even in times when many advanced economies lowered their interest rates to zero, the overnight rate, seven-day rate, and ten-year government bond yield in China have remained within a comfortable range. China is well positioned to continue the stance, and we will maintain a prudent policy even when other countries start monetary policy normalization. For example, after six rate hikes in the US, the yield curve of RMB has been higher than that of the USD by 80 to 100 basis points, and the spread has been stable. We believe that, a generally stable monetary policy stance and the spread pattern will facilitate economic development. To judge whether a policy is stable and good, in the first place, we look at its impacts on the real economy, the financing conditions, and the strength of financial support to the real economy; in the second place, we look at expectations, how people think about what will happen. From these two perspectives, we are in a relatively comfortable range.
Q: As China further opens its financial market, there may be volatility in cross-border capital flow. How will China address it?
A: The cross-border capital flow is stable. As we promote opening-up of the financial sector, we will take capital flow into consideration. We hope to see stable capital flow for it is conducive to global allocation of resources. Besides, with the inclusion of Chinese stocks and bonds in the MSCI and Bloomberg indices, foreign institutional investors need to allocate their assets accordingly by investing in China’s stock and bond markets. Meanwhile, the Chinese investors also need to go for a more global allocation of assets. As China further opens up, the Chinese households and institutions can allocate assets globally to a greater extent. Based on the demands of investors both at home and abroad, cross-border capital flow is expected to be stable and efficient.
Q: You just announced measures for further opening-up of the financial sector. Is this a “big bang” reform?
A: The Chinese philosophy places much emphasis on gradualism, and we have been cautious when enforcing each reform policy. As I’ve mentioned earlier, going forward, we will follow three principles in promoting financial sector opening-up. First, we will adopt pre-establishment national treatment and a negative list. Second, financial sector opening-up will go in tandem with the progress in exchange rate regime reform and capital account convertability. Third, while opening up we will stress financial risk prevention, and build financial regulatory capacity compatible with the openness of financial sector in order to prevent financial risks. These reform measures are rolled out after careful considerations and after reaching the conclusion that the regulatory capacity, data availability and other conditions have already matured. I wouldn’t say it’s a “big bang” reform.
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