An interview with China’s central bank governor Zhou Xiaochuan

(From Caixin Online)

The central bank governor discusses a range of issues with Caixin, from reforming the exchange rate regime to adopting a digital currency

By staff reporters Wang Shuo, Zhang Jiwei and Huo Kan

Recently Governor Zhou Xiaochuan had an interview with Caixin and talked about the yuan exchange rate regime reform, macro-prudential policy framework, digital currency and other topics. The following is an edited transcript of the interview.

PBOC Gov. Zhou Xiaochuan

PBOC Gov. Zhou Xiaochuan

Caixin: The central bank convened its system-wide annual work conference in January. We learned that before the Spring Festival, the branch offices were studying the decisions adopted at the conference and discussing ways to implement them. Can you briefly describe the major agenda items of the annual work conference?

Zhou Xiaochuan: In the PBOC’s annual work meetings, we usually discuss and analyze the economic situation and financial market developments in China and beyond, and follow up on our tasks to implement the decisions of the Central Economic Work Conference and to advance financial sector reform. This year, we also discussed at length subjects including the foreign exchange market, the exchange rate, macro-prudential assessment, the central bank’s digital money and Internet banking, etc.

At present, market participants have different views on the outlook for China’s economic growth, which also affects their assessment of the yuan exchange rate. What is your view on this issue?

There are indeed differences in the views of the economic situation and financial market developments. It is necessary to analyze the current state of China’s economy in a comprehensive and objective way. Overall, the performance of the economy remains within a reasonably strong range. Against the backdrop of a slowing world economy and global trade, and heightened fluctuations in the international financial markets, China maintained a growth rate of 6.9 percent in 2015, still relatively high compared with other countries.

The change in China’s growth rate can be attributed in part to weak performance of the global economy. It also reflects the structural adjustment policies adopted by the Chinese government. Such a change is conducive to the ongoing efforts in China to pursue more sustainable and quality growth and is beneficial to the rebalancing of the global economy. Going forward, China will strengthen structural reform, especially supply-side reform, in order to strike a better balance among economic growth, structural adjustment and risk prevention, and to achieve sustainable and steady development.

In your view, what will be the major driving forces for growth in China?

China’s savings rate remains quite high and will continue to be translated into high investment. Though part of this investment will be outward investment, its proportion will be very small compared with domestic investment. This will not lead to a moderation of investment gains and a reduction of investment opportunities in China. There is a good basis to keep domestic investment at reasonably high levels.

Despite the change of comparative advantages in trade, China’s manufacturing industry has enormous advantages in upgrading and transformation, by moving up to the middle and high-end of the value chain. The manufacturing industry is going through short-term adjustments, partly due to environmental requirements, to cut expansion into highly polluting industries that consume lots of energy and resources. In 2015, the service sector as a share of GDP increased from 43 percent to more than 50 percent. The space for further expansion is large. In addition, measures have been taken to ease market access for private capitals. Problems are being solved step by step. The scope for mass entrepreneurship is vast.

There are widespread concerns about the fall of the GDP growth rate. After remaining in double digits for many years, the growth rate has declined consistently, and fell to 6.9 percent in 2015. This has given rise to pessimistic sentiments.

Among the views expressed on China’s growth, two factors are worth mentioning. First, China contributed enormously to the global GDP growth in 2009 and 2010. With a population that was 20 percent of the world total and GDP less than 10 percent of the world total, China’s contribution of the global GDP growth was over 50 percent. We must recognize the special circumstances and the sharp contrast between China and other economies at that time. While the advanced economies in Europe and North America were responding to the shocks of the financial crisis, China adopted a stimulus package. This situation is not to be regarded as a norm. For China, 50 percent is not a sustainable level of contribution to global growth. At present, China contributes around 25 percent to the world GDP growth, and this is relatively close to normal. This is not a hand landing at all.

Another factor is that in the past China put a lot of emphasis on GDP. In fact, looking at worldwide experience, there is not a direct correlation between GDP and the exchange rate, especially the growth of GDP and exchange rate movements. For example, overly rapid GDP growth sometimes causes overheating and high inflation, putting downward pressure on the currency. Some misguided views have been expressed in the debates around the world. In fact, the exchange rate of a currency is related to the international competitiveness and health of the economy of the issuing country.

When we take a closer look at economic theory and international experience, we see that the current account balance, among all the economic fundamentals, is the most related to exchange rate. In 2015, China’s current account surplus remains massive. In particular, the surplus in the trade of goods reached a historic high of US$ 598.1 billion. There is another fundamental, i.e. movements of real effective exchange rate, or the relative movements of inflation, that affects exchange rate. The inflation target of the United States, Japan and Europe is 2 percent. At the end of 2015, China’s CPI was 1.4 percent, a relatively low level for China. Low inflation is conducive to the stable value of a currency. Read more


Categories: Asia Unhedged, China

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