Tradition has it that the head of the Federal Reserve is the most influential central banker in the world.
Ben Bernanke still is. But Zhou Xiaochuan, the governor of the People’s Bank of China, is beginning to run him close.
China’s role in the global economy is such that the world’s markets now hang on Zhou’s every word. Will he allow the renminbi to appreciate? Will he open up China’s currency to become a key global trading tool? What will he do with China’s more than $3 trillion of reserves? Will China continue to be the biggest owner of US treasuries, with latest estimates suggesting it holds a staggering $1.3 trillion of these securities?
And most important of all, can Zhou carry off the delicate balancing act of controlling China’s inflation rate and still maintain the kind of growth rates on which the economies of the developed world now so depend?
Zhou answered all of these questions and more in an exclusive interview with Clive Horwood:
What do you consider to be the most important decisions that you have made over the past 12 months? What impact did these decisions have?
Beginning from the second half of 2010, with the monetary policy stance shifting from "relatively easy" to "prudent" and with the introduction of macro-prudential policies, monetary conditions are returning to normal.
Since the outbreak of the global financial crisis, China has taken steps to further promote financial reform, based on lessons learned in the crisis. What makes China different from other countries is that we are in the transition from a planned to a market economy and need to undertake a large number of reform tasks. Therefore, our financial reform is necessitated by both the financial crisis and the transition.
In recent years, the People’s Bank of China has promoted financial reform in several key areas jointly with other agencies, such as the reform of state-owned commercial banks through recapitalization and the establishment of a modern corporate governance structure, the reform of the renminbi’s exchange rate regime, and the introduction of a macro-prudential policy framework. These are all very important reforms and have had a significant impact on development of the Chinese economy and financial system.
How are you balancing the need to maintain growth but contain inflationary pressures? Do you expect monetary tightening to continue?
After the outbreak of the financial crisis, a stimulus policy package had to be adopted promptly in China to mitigate the impact of the crisis, through the use of expansionary fiscal and monetary policies to restore market confidence, to stabilize economic growth, and to support recovery. Overly expansionary policies may be associated with inflationary pressure, but the priority at that time was to address the impact of the financial crisis.
The price hike that began in the second half of 2010 is related to the expansionary measures, and also to many other factors, such as excessive global liquidity, massive capital inflow, output fluctuation of domestic agricultural products, rising labour cost, and so on.
As the recovery was more and more solidly based, the PBC promptly shifted the focus of macroeconomic policies and took inflation control as our top priority. We will not adopt macroeconomic policies that might trigger a hard landing. Rather, PBC aims to achieve a soft landing by having the policies gradually produce their effect, and pays attention to preserving the stable and sustainable growth of the national economy. Having a medium-term inflation target of around 4% is aimed at achieving a balance between growth and inflation, and providing room for correcting price distortion and further marketization. Globalization and the continuing opening-up process have also made some sectors of the Chinese economy more susceptible to the international capital flow and commodity prices volatility.
Banks in China complained twice, around this Spring Festival and in July, of very tight liquidity conditions. How do you weight the need to preserve banking system liquidity against trying to control inflation?
Some people may feel that money is fairly tight, because they compare it with the crisis-response period in 2009 and 2010. In fact, money and credit growth are comparable to their normal pre-crisis levels. This, in my view, reflects the return of monetary policy from the unconventional, crisis response mode to its normal state.
Many economists see increasing the deposit rates up to above the inflation rate as the key to encouraging domestic consumption and curbing the speculative investments in commodities and real estate. Do you agree? What are the necessary conditions for a hike of the deposit rate in the near term?
The PBC has always valued the use of interest rate tools. Since October 2010, the benchmark interest rates have been raised five times. In an increasingly interconnected global economy, central banks need to evaluate international financial market and global economy when considering the use of price tools. With recovery in major advanced economies being tepid and global liquidity abundant, a large volume of capital is flowing into emerging market economies and making their macroeconomic management more difficult. As such, in order to make our monetary policy more effective, we need to carefully calibrate a combination of price tools, quantitative tools and macro-prudential policies.
You’ve said that it can be difficult to strike a balance between fighting inflation and meeting the financing needs of small and medium-sized enterprises. What measures can you take to remedy this? Many small and medium-sized enterprises complain that raising funds can be difficult. How justified are these concerns and what more can be done to help onshore fundraising?
The SMEs in China as a whole are getting improved access to financing. As of June 30 this year, outstanding SME loans grew 18.2%, about 1.3 percentage points higher than the general credit growth. In particular, the outstanding small enterprise loans grew 25.9%, about 9 percentage points faster than the general credit growth. As of June 30 this year, outstanding SME loans as a share of all corporate lending went up 3.7 percentage points from its 2008 level.
