On the morning of October 19, which was the Open Day of the Financial Sector Delegation, Governor Zhou Xiaochuan answered questions from the press during the 19th National Congress of the Communist Party of China (CPC). Q: I am with the Bloomberg. The report to the 19th CPC National Congress mentioned the further opening-up of China's financial market. The market is wondering if the floating band for the RMB exchange rate will be widened soon. Is now a good time for the RMB to float within a wider band? What are the central bank’s major considerations when pushing forward this reform? Given that the RMB exchange rate is quite stable, is now a good time to further liberalize the capital account? When will the RMB become fully convertible? Thank you. A: Exchange rate floating is more determined by market supply and demand and the progress of RMB as a freely usable currency. This is a long and on-going process which, despite substantial progress over the past years, will continue into the future. About timing, now is not a special time. But in general at the National Financial Work Conference this July, both General Secretary Xi and Premier Li sent out a signal in their speeches, emphasizing further opening-up of the financial sector. Yesterday, General Secretary Xi stressed again in his report to the 19th CPC National Congress opening-up and introduction of competition mechanisms. Therefore, in such an environment, things will undoubtedly move towards this direction. Expanding the RMB floating band is not a top priority for the time being. First, exchange rate movements have rarely been limited by the current floating band and are mainly determined by the changes in market supply and demand. Of course, broadening the floating band sometimes signals further opening-up, indicating continuous progress in exchange rate regime reform and the decisive role of market forces. But we also need to note that at present, expansion of floating band is not a top priority. There are several other important aspects, including market opening-up. Shanghai-Hong Kong Stock Connect, Shenzhen-Hong Kong Stock Connect, and Bond Connect are all examples of market connectivity. The Belt and Road Initiative is another example. Further opening-up also involves cooperation among institutions and wider financial market access. I invite you to take a more comprehensive view in the contents of opening-up. Thank you. Q: I’m from the CCTV. The report to the 19th National Congress mentioned the “two-pillar” management framework. My question is how these two pillars will coordinate with one another in the future, and how to further improve and strengthen this two-pillar framework? Thank you. A: It will take a while should I explain it in details. As highlighted in various kinds of economics textbook, central banks will first of all use monetary policy in their management efforts. New monetary policy tools and methods have emerged since the global financial crisis, mainly as adjustments to and recalibration of the targets to a certain extent. Central banks’ monetary policy toolkits have since then become more diversified. Another important way of adjustment is the macro-prudential framework, which was advocated by the G20, the Financial Stability Board and the Basel Committee on Banking Supervision after the global financial crisis broke out in 2008. The rationale behind adopting macro-prudential policies is that there are too many pro-cyclical factors in normal economic cycles. When an economy is on the upswing, stock market and corporate profits both go up. These factors reinforce one other and work towards the same direction. Thus, adoption of countercyclical policy measures, as we call them, becomes necessary. The financial crisis has also underscored the importance of financial stability, and subsequently the need to adopt measures to preserve financial stability. Meanwhile more emphasis has been put on updating financial regulatory standards including Basel III, which has laid out new requirements in capital quality, liquidity, leverage, and etc. Another set of macro-prudential measures is to impose reasonably higher requirements on systemically important financial institutions including Global Systemically Important Banks (G-SIBs) and Domestic Systemically Important Banks (Industrial and Commercial Bank of China, Agriculture Bank of China, Bank of China, and China Construction Bank are all G-SIBs; Ping An Insurance Company of China is a Global Systemically Important Insurer) as these institutions have huge impact on the market. We have already worked in these areas but more efforts are needed in terms of institutional arrangements, rule making, and policy coordination. Hence, this July the National Financial Work Conference has emphasized the “two-pillar” framework and the need for better coordination between the two pillars. Regulators, including the PBC, CBRC, CSRC and CIRC, as well as major financial institutions, all hope to play their part to improve coordination. From a global perspective, developing a two-pillar framework is an exploration in progress. Thank you. Q: I’m with China Daily. My question is for Governor Zhou. General Secretary Xi talked about preventing the deepening of systemic financial risks in his report. How would you evaluate the current systemic financial risks in China? What will be the key measures on financial deleveraging in the future? Also, there has been a lot of attention on the high corporate debt. What’s your comment on this? Thank you. A: First of all, discussions about systemic financial risks increased in the wake of the global financial crisis. Financial risks include basic risks associated with financial markets and financial institutions. For example, some unhealthy financial institutions fail to meet relevant standards, and as a result may have to be closed or go bankrupt. By comparison, systemic financial risks can lead to financial crisis, set off dramatic chain reactions in the market, and cause great shocks to the economy and employment. While systemic financial risks and the focuses differ from country to country, they do have something in common. Above all, all countries need to prevent risks of hyperinflation. Besides, all countries need to guard against the risks of drastic adjustments of asset prices. Asset bubbles can build up in capital markets, in the housing market, in shadow banking activities, or in the derivatives market. For countries in transition, especially those shifting from the planned economy to the market economy, there can be another real financial risk, which is bad health in most financial institutions. One reason is that, during the transition process, there could be a large amount of non-performing assets, and financial gaps may cause tremendous losses. Moreover, a lack of adequate rules and regulation in the process of institutional change could also lead to widespread problems in financial institutions. In fact, a large number of financial institutions had collapsed or were sold to foreign investors during this process in many transition countries. This is also a type of systemic risk. What’s more, as I mentioned just now, if there are too many pro-cyclical factors in the economy, cyclical fluctuations will be amplified, and over-optimism in good times can lead to the build-up of tensions, which at a point could trigger sharp correction, the so-called Minsky Moment. This is a key risk that we want to prevent. As for deleveraging, there have been a lot of research in China, and there are many comments from overseas observers. Above all, if the aggregate credit is in good control, it will not grow too fast, which will help bring down the leverage. Corporate leverage in China is relatively high. This could be attributed to the inadequate direct financing and over-reliance of firms on borrowing and debt financing, as Chairman Guo Shuqing has just said. In addition, inefficient use of capital by firms is indeed a problem, as reflected in poor efficiency of investment and working capital. So the emphasis is on supply-side structural reforms. Our efforts to cut overcapacity, destock, deleverage, lower costs and bolster areas of weaknesses not only require adjustments by firms, but also depend on how banks look at their asset quality. Firms and banks must work together. Also, it is possible that some corporate borrowings in fact are debts incurred by local government financing vehicles. Sometimes local governments obtain financing in the name of local SOEs and let the SOEs bear the obligations. We have to take this problem seriously to prevent unhealthy practices of local governments in using financing vehicles and taking on various disguised obligations, such as inadequate fiscal discipline or crossing the lines. (Of course, situation differs significantly from place to place. Some are good, others are not.) The level of household leverage is not that high in China compared with other countries, though it has been rising fast in recent years. That said, I want to draw your attention to the fact that, this fast pace does not mean deleveraging right now. Instead, as the leverage rises, we need to pay attention to its quality, making sure that growth of household debt is steady and of high quality. Thank you.(Come from:Come from:The people's bank of china) |
