Q：How do you comment on Zhou and his nearly 16 years work at PBOC?
A: I’m actually speaking as an economist, a professor of economics, who is interested in central banks, not as a former governmental official.
A: I think Zhou Xiaochuan has been an outstanding central bank governor, both for China and as a representative of China on the international area, he is very widely respected, he is smart, articulate. I don’t speak Chinese, but I assume he is articulate in Chinese, and he is very articulate also in English, which he uses in many international meetings that he goes to. He has been in the forefront of economic reform of some areas, particularly the financial sector, but he is as a reformer, being cautious in pushing forward in the reforms, which I think has been wise, given the circumstances in China. So I would say is, President Zhou is an outstanding central bank governor, and China will lose a very good man, if he retires.
Q: let’s talk about some of his deeds in the past, in order to cope with the financial crisis in 2008, there was a balance shift in the PBOC bandage rapidly, and some people may disagree with Zhou’s measures, which he has taken during his time, so how do you think about his policy during the financial crisis?
A:The first thing I should say is, China itself did not have a financial crisis, the financial crisis was concentrated in the United States and in Western Europe, and the problem is, the financial crisis went into a worldwide recession, which influenced Canada, Japan, China and other countries that did not actually experience the financial crisis.
So I would say that the policy pursued by China in 2008 and in 2009 was responding to the worldwide recession. And I think that under the circumstances at that time, a substantial easy monetary policy was highly warranted. And China of course was not alone, the US, European Central Bank and East Bank in England and East Bank of Japan, so China was in think with other major central banks of the world. I think it was generally a wise and decisive decision, it has a legacy, but it would be much worse today if those decisions had not been taken.
China is a little more complicated in one respect, like other countries, China pursued an expansionist fiscal policy, but the financing in the physical stimulus in China was mainly by the bank system, not directly by the government, so monetary and fiscal policy was more closely related in China than those in United States, Britain or ECB, which is of course just monetary policy, fiscal policy rest with the National States. And of course, the PBOC was not as independent to the central government as in other leading countries.
Q: How do you like the process the RMB internationalization? And what role do you think Zhou has played in the RMB internationalization?
A: That is a complicated question. Starting with the meaning of internationalization, what do China actually mean by internationalization of RMB? I have the impression, but I do not read Chinese, so I cannot follow Chinese literature. China are competing in two very different issues:
One is being, I would call it, a normal currency, which is available for every international use. Like Canadian dollar or Australian dollar or British pound, they are fully convertible, residents can buy other foreign currencies without restriction, foreigners can invest in Canada or Australia, which from a currency point of view, without all kinds of restrictions. So at that point of view, it’s a normal currency which is available for use around the world. As one step, and in order to achieve that step, China is not there yet, and RMB needs to be made fully convertible for that step. And I think China has been cautious, or correctly cautious in moving forward, that’s one of the issues of becoming a normal, international currency.
I have the impression among non-economists, they have a quite different status on international currency, they want to be like US dollar. You know, an international currency, in a sense, the US dollar is used in transactions between countries that do not involve United States. The point I want to make there, I want to make several points.
First, that decision is not made by China, China has its steps and conditions, by which step can take place, that is making RMB a normal currency, as I would call it, but it is foreigners who will decide whether RMB becomes an international currency in that sense, not the Chinese government. That’s the first point, that foreigners will decide.
The US government never pushed the dollar as an international currency in those terms, that was decided by foreigners. And similarly, just like in the 19th century, that issue will be set by foreigners, the Chinese government has to create conditions, but it’s the foreigners that will decide whether the RMB becomes an international currency. I do not see it will take place in decades.
Q: Zhou has said interest rates liberalization of RMB has basically accomplished, I don’t know whether you have heard of his words.
A: I haven’t heard his word on this, but I agree with what he has said. From a formal point of view, the setting interest rates on deposits has been in whatever it was, 2014 I think, so a year and half ago. So from that formal point of view, now it has been completely liberalized, lending rates were liberalized some years earlier in various phases, so he’s correct from a formal point of view.
Q: How like the rapid appreciation of RMB and the weakened dollar index in recent months?
A: The dollar has weakened against many currencies, not just against the RMB, actually it is rather less weakened against the RMB than other currencies. But you also need to know the starting point, the dollar is exceptionally strong, let’s say two years ago, and two years and half ago, so several correction is not surprising, that other currencies have appreciated not just the RMB, but the Euro, one exception is the pound, which was influenced by blackened, the Canadian dollar has appreciated against the US having been very low two years ago.
You know, currency move around a lot and this is one of the general movements. In this case, correcting the very strong dollar was roughly two years ago, that interpretation I would not give a deeper interpretation. We’re gonna see in the coming year, given the US tax reductions, a substantial increase in US interest rates, in the next year to 18 months, that will further strengthen the dollar. But these are all modest movements, the RMB was at one time around 7, or 6.9 to the US dollar, it has gone back to what it is now, 6.3, which is where it was before the rise of the dollar. So anyway, all these are still relatively modest movements.
Q: Do you think the RMB and China’s financial policies have enough impacts on the world yet? I mean do you think they have large influence on the world economy?
A: Well, yes or no. I think the fact that China is a very high saving country, and has a substantial current account surplus, it does have an impact, it is a big economy, it certainly has an impact on the rest of the world. Let’s say, net source of savings for the world as a whole. Whether that is a good thing or bad thing depends on the condition of the rest of the world, at the moment, it is probably a good thing, six years ago, it would be a bad thing. Because the world’s economy is in a better shape now than it was six years ago. So in that fundamental sense, my answer is yes, China has an important influence on the world’s economy as a whole.
If you’re talking about small changes in monetary policy or monetary rules, as a domestic economy, the answer to further expectation is No. Because China has exchange controls on capital movements, both inward and outward, and the usual influences in changes of monetary policies in big countries, said US or Euro zones like Britain, it is through capital movements. But capital movements are in or out, capital movements cannot move in or out freely in China. So the influence on the rest of the world’s economy of changes in monetary policy are heavily muted by existence of capital controls.
Q: You know the leadership of Federal Reserve and PBOC has both changed recently. What do you think of the financial policy trend of China and US will be?
A: Speaking of the US, I do not know Mr. Powell, the new chairman, but he has been a member of Federal Reserve for a number of years. And it’s a collective decision in the United States, the president is out of the loop, the president does not determine monetary policy, it’s the open market committee of the Federal Reserve that determine it. Powell has been a member of this, deeply immersed with all of those debates that’s going on inside the board, I think he will be a source of continuity in Federal Reserve policy. But of course, Federal Reserve policy will be influenced by the American economy, the way circumstances are now, growth looks like it is relatively good in the US economy. And under the circumstances, I would expect to see some tightening of monetary policy in the next 18 months, but not because Yellen is retired, and Powell has replaced her, I would say the same thing even Yellen be reappointed. So this is the continuity of process, influenced by the external environment, not a change of leadership.
Q: Do you think will there be any conflict between China and US economy? Regarding the financial field and the international market?
A: Not at the moment, but it’s possible that some economies are growing more slowly, and the other is growing very rapidly, therefore they want to pursue different monetary policies, because of the circumstances in each country, that can happen from time to time. Again, China’s economy is more isolated because of its capital controls, if you just look at the current circumstances, I don’t see any particular conflict between the two.