Zhou attracts as much attention as U.S. Federal Reserve
Chairman Ben Bernanke and European Central Bank President Mario Draghi because
the world’s financial markets are vitally interested in China’s interest-rate
trends, bank deposit reserve ratio adjustments, and yuan-dollar exchange rates.
Zhou is a big-thinking strategist with firm
ideas about financial reform. He’s also a tactician who can find opportunities
for promoting reform in any situation. He harmoniously pursues realism and
idealism, seeking gradual progress while pushing for financial reform.
The year 2011 was difficult and complex for
China’ economy. The year 2012 will be no different. What does Zhou see ahead,
and what lessons can be learned from the past year?
In an interview in December, shortly after the
Chinese government set its 2012 policy goals at the annual Central Economic
Work Conference in Beijing, Zhou sat down with Caixin to discuss his personal
views and the central bank’s views toward inflation and monetary-policy
adjustments, interest-rate control, exchange-rate reform, capital-account
liberalization and the internationalization of the yuan. His comments follow:
Caixin: China’s
macro-economic policies were adapted to fit changing economic situations in
2011. How do you see the economic situation in 2012 and corresponding policy options?
Zhou Xiaochuan: The Central Economic Work
Conference clearly articulated macro-economic policy, taking into account two
considerations: Efforts to prevent an economic downturn, and efforts to
restrain inflation.
First, we are encountering concurrent issues
in the international arena, including an evolving European debt crisis, U.S. economic uncertainty,
and slowing growth in emerging economies. More importantly, the
international economy is changing rapidly, and its outlook remains uncertain.
Thus, we must be prepared to respond to new situations.
On the other hand, looking at China’s domestic
economy, local governments will have leadership reshuffles in 2012, and the
capacity for growth in the Chinese economy is still great. At the same time,
the consumer-price situation has changed for the better, and the need to
control inflation is not as pressing as it was in early 2011. Of course, there
are still uncertain factors, such as the impact that the real-estate market
will have on the national economy.
Overall, we need to plan for the worst external environment
without relaxing efforts to keep prices from rising too quickly. We need to
rationally manage inflationary expectations. Meanwhile, economic structural
adjustment is still a difficult task. Macro-economic policy makers need to
weigh all these issues.
China’s consumer price
index (CPI) grew 4.2% in November, 1.3 percentage points below October’s and
below market expectations. How do you view this change?
The target of 4% inflation set for full-year
2011 may have been hard to achieve. Ultimately, it was likely to be around 5%.
Technically speaking, year-on-year
monthly comparisons sometimes give wrong impressions. Since the global
economic crisis of 2008, economic data have fluctuated significantly, making
for a large base-number effect for year-on-year comparisons. The effect of the
base number must be considered in all monthly year-over-year numbers.
I have always advocated the use of seasonally adjusted
sequential data, which reflects CPI trends quickly. In short, inflation
control has achieved some results and is moving in the right direction, but we
cannot be too optimistic.
From the perspective of the domestic driving
force contributing to the growth of the Chinese economy, the quality of life for
Chinese people needs further improvement. There is still plenty of potential in
urbanization, and there is still room for expanding the nation’s infrastructure
on a large scale. These projects are all somewhat government-led.
Looking at national conditions and China’s
stage of development, the domestic economy is prone to overheating. Looking
internationally, CPI growth in emerging markets is generally higher than in
developed countries. This is not to say that there is currently a risk of
overheating, but that inflation cannot be taken lightly.
How do you assess the
effects of China’s integrated use of quantitative tools and target-price-based
instruments to achieve regulatory goals in 2011?
There are several aspects that require
attention. First, the frequency and intensity of using quantitative tools and
price controls are different. If you only look at the frequency of adjustments,
it seems quantitative tools are used more often. But you need to look at the different strengths of the
adjusted results that different tools accomplish.
Second, excess liquidity needs to be
restrained. Only by estimating the existing liquidity situation can you judge
whether a policy adjustment’s strength is appropriate. Third is the judgment of
neutrality. Because of the international imbalance, there should be
quantitative hedging. Only when hedging reaches a certain point is it neutral.
That is, you must distinguish
tightening, neutrality and loosening based on quantity.
Of course, you have to consider the mutual
impact of quantitative and price-based policies. In reality, they are
connected. This can be seen clearly through a study of short-term borrowing
rates on the interbank market. Quantitative adjustments bring price reactions.
Conversely, interest-rate adjustments bring quantitative changes in liquidity.
Since November, the
Chinese financial institutions’ yuan funds outstanding for foreign exchange
have continued to decrease. Has this provided a certain amount of room for
choice in monetary policy?
We’ve always had a relatively wide space for
setting monetary policy. The policy trade-off is mainly related to
macro-control goals. For example, deciding whether to pursue higher employment
or lower inflation requires repeated consideration of a balanced goal. Other
future uncertainties will affect changes in policy objectives.
Of course, there will also have some
constraints, and every policy choice brings some negative effects. Differing economic conditions
in China’s eastern, central and western regions, and a lack of domestic and international synchronization
will generate arbitrage in opportunities. As long as the arbitrage is not on a
massive scale, it is a question of balancing the positive and negative effects
of policy, which requires making judgment calls.
You mentioned that now
is a special time (for China’s economic development). But is it also a time of
reform?
Sometimes, reform’s timing is complicated.
Often, difficult reforms that require strong commitments are launched when
pressures are relatively great. This is what we saw with the design of
exchange-rate reform in 1993 (which was implemented Jan. 1, 1994). At the time,
people said exchange-rate reform required three conditions: very strong
exports; adequate foreign-exchange reserves; and experience in macro-economic
regulation. The situation at the time was just the opposite, but reform was
still pushed forward.
Calls for
market-oriented interest-rate reform have been heard frequently over the past
year. How do you see the timing for further reform, and the risks?
Market-oriented reforms on interest rates are
always being encouraged. Specific implementations should be introduced in an orderly fashion, and on
the basis of overseas economic situations. From a sequencing perspective, the
first step is, through reform, to put hard restraints on financial
institutions. In this way, the competitive behavior of market players becomes
more orderly, and price-liberalization issues are not too great.
From past experience, soft restraints on
financial institutions’ competition behavior will always be ineffective, and
there will be problems. It should be said that with joint-stock reforms and
successful listings of 2010, the soft restraints and fair-competition issues of
financial institutions are gradually being resolved, and conditions are there
for interest-rate market reforms to advance.
When comparing international and domestic
situations, domestic and foreign pressures have differed mainly since the
financial crisis. China maintained a relatively high rate of growth, while some
developed countries kept interest rates at zero. Advancing market reforms for
interest rates at a time when there are wide gaps between interest rates will
create some special problems.
Credits -marketwatch
