Q: From aperspective of an economist, how do you comment on Zhou Xiaochuan and his nearly16 years’ work at PBOC?
A: I thinkgovernor Zhou has made a significant contribution, not only to the bank, butalso to the health and well-being of the Chinese economy, and I’m glad toprovide specific as you like what I have in mind in both regards.
Q: Can you brieflycomment on his contribution on China’s financial market or reform?
A: Yes. Let mestart off with his role at PBOC, and I think what’s clear to monetary economicsense of central banker outside China, is that during governor Zhou’s time inoffice, the PBOC has become significantly more professionalized, compared tobanks in early history. And I point not only to governor Zhou himself in theway which he has run the bank and represented abroad, and also articulated themonetary policy, but to many of the economists whom he has brought into thebank.
As for thecomment, I think governor Zhou deserves a lot of credit for attracting, maintainingand supporting such a high level group of people, and many others as well. Iwould begin with saluting governor Zhou’s success at professionalizing thebank.
Now next, I wouldturn to the success of the policy during governor Zhou’s term. And there Iwould point to three elements that strike me as important and successful.
First, if you lookback to period before governor Zhou took office, inflation in China was bothhigh and volatile, and also the growth of money and credits was relativelyunrestrained in various periods. I think governor Zhou has done an excellentjob in steering Chinese monetary policy so that inflation has become muchbetter behaved, and the growth of money and credits was much more restrained, thatafter all is the central task of monetary policy in any economy. And I thinkthe PBOC gets high marks now, for the way in which they’ve been able to make alot of progress in this area during governor Zhou’s term in office, I thinkthat’s a real achievement for him.
Second, morespecifically, the rest of the world is extremely impressed with the way inwhich China manage to maintain its economic growth in the aftermath of theworldwide financial crisis of 2007-2009. I remember being in China, maybe2009.I recall the foreign economists were there who study China, many of themwere extremely skeptical that China would be able to maintain its growth rate.At the same time certainly the developed countries were experiencing a severedownturn, many of them like the United States was in the worst economicdownturn since The Great Depression of the 1930s, the Chinese economistspresent were quite confident that China’s economic growth will continue, andthey were right, they turned out to be exactly right. We all know this has todo with many things other than simply monetary policy and has to do withgovernmental investment programs, and other contributions. But nonetheless, ittook some effort on the part of PBOC monetary policy to make that happen aswell, so I think it was a significant economic event that took place duringgovernor Zhou’s term.
And the third andthe last element that I want to point to, is the period of extreme volatilityboth in the RMB exchange rate and also in the prices on the China’s securitymarket that China sustained a few years ago. This could have been very bad forChina and Chinese economic growth, but it wasn’t, it turned out China managedto work through this period of volatility and thrived very well. Once again, I’msure this had to do with many elements of China’s policy other than just PBOCis doing, but for sure PBOC had a large part to do with it. This also happenedon governor Zhou’s term, and I would give him a lot of credit for that as well.
Those are thethree things I had in mind.
Q: But you know, inorder to cope with the financial crisis in 2008, the balance sheet of PBOCexpanded rapidly, some people didn’t agree with Zhou’s measures taken at thattime, how do you like these policies?
A: I would look atthe balance sheet expansion and like what other central banks were doing. Lookat my own country here in the United States, before the financial crisis, thebalance sheet of the Federal Reserve system was about 800 billion dollars, thepeak was 4.5 trillion dollars, so that means the balance sheet of FederalReserve multiplied by a factor about 5.If you look at other central banksaround the developed world, the multiple was similarly about 5.Bank of Englandand European Central Bank it’s about 3-4, although they are still there, notthrough yet. And the Bank of Japan similar multiple, the Swedish Riksbank wasabout a multiple of 3.So in all of these cases, central banks did the policythat governor Zhou pursued, it was in keeping with other well-run central bankswere doing at the time, so I certainly would not be critical.
Q: So I think fromyour perspective, you think Zhou is quite a successful and outstanding governor.
A:Yes,I do, Ithink he will be remembered in the future, in the same way that we look back atsome of the crucial governors, we would call them the Chairman of FederalReserve, people like Paul Volcker, I’m guessing he will be remembered in that wayin the future.
Q: I would like toknow what do you think of development and trend of China’s financial marketafter Zhou retires?
A: Well, I thinkthere are still some tasks to be done. The most obvious one, at least mostobvious to me, is dealing with the legacy of bad debts. I’m talking in part ofthe banks of course. But also, even the bad debts held by various preventionand even local governments, we all know that a large part of China’s economicgrowth in recent years has been financed by debts. Many of these debts are notreally good debts in the way that we at least think of them.
So I think workingthrough that legacy is going to take China quite a bit of time, it’s a slowprocess, and the magnitude of the problem in China is very large. I’m confidentthat it can be handled, so I don’t think this is any kind of substantialthreat, but it is a real problem that needs to be taken care of. At leastaccording to western press, some of the recent actions by the government seemedto show that they are very serious about planning to make progress, that’s onearea in which I would think that progress need to be made.
I think the secondwould have to do with is, what I would call professionalization of the banks inmy sense, in meeting people that are the personnel at the top level of the bigfour banks, in their positions, for political reasons rather than because theyare the right people. I’m an economist, but I would hope that over time, Chinawill evolve a way of allowing those institutions to be run in a moreprofessional way.
Q: Could you talkabout what do you think is the biggest challenge for RMB to be an internationalcurrency?
A: Well, it’s notjust the challenge for the currency, it’s the challenge for the market behindthe currency, the security of market. Because when you talk about peopleholding dollars, yes, I understand some people broad hold dollar deposits, that’snot really what we mean. For example, when we say China holds however manytrillions of dollars, the dollars that China holds, we don’t mean they’reholding dollar deposits, we mean they’re holding various assets denominated indollars. So talking about the use of currency internationally, we’re reallytalking about the ability of international investors to participate in acountry’s security market, it has to do in the first instance with the trading,rules also has to do with what security is there to buy in the first place. Sowhen it go back to the dollar, when we’re talking about people holding dollars,that means mostly they’re holding things like treasury deals, they’re holdingthings like Bank CDs. So I think there are some developments of securitymarkets in China that needs to happen before we can think of RMB is having kindof opportunities connected to it, that the dollar is sterling and the Euro andother country’s currencies like that have.
Q: You know, thatRMB has joined SDR for two years, do you think this will have a large impactfor RMB to be internationalized?
A: No, I don’tthink so. I’ve always been very skeptical of the SDR, I don’t think it hasanything more than symbolic importance, to me, it doesn’t matter a bit.
Q: So you think itdoesn’t make sense, only conceptional?
A: Yeah, I don’tthink it has much practical significance.
Q: Did you notice thatthere has been a rapid appreciation of RMB recently?
A: Yes.
Q: And also the dollar index has recently been a little bit weakened, what do you think aboutthis kind of appreciation, maybe relatively appreciated and depreciated?
A: I don’t haveany view over a short run, thinking as an economist, it’s not helpful forassessing currency fluctuation in a short run. I think over a long period oftime however, it’s likely that at least on a real basis, the RMB willappreciate relatively to the dollar, and the dollar will depreciate relativelynot only to the RMB, but to other currencies as well. And this is just a matterof long run supply and demand for currencies, in part driven by notions oftrade flows, but also by portfolio diversification I think. 25 years from nowfor example, I believe the role of dollar in international portfolios will besmall than it is today, I believe the role of RMB will be larger, and that kindof shift is bound to affect currency values over the long run.
Q: Do you thinkRMB is a safe currency? I mean for foreign exchange reserve to avoid the risksfrom international financial market?
A: I don’t thinkit is there yet, over some periods of time, I’m confident that will happen, butI don’t think RMB is there yet. It goes back to the same issue of investmentpossibility and liquidity of market and safety of assets that we were talkingabout before.
Q: So you thinkthere is still a long way to go?
A:I guess I don’tknow how fast the transition will be, let’s say 20 years, I would like to thinkthe transition will be completed by then, but maybe faster, I have no idea.
Q: Do you thinkthe RMB and China’s financial policies have enough impact on the world’seconomy yet?
A: I think itcertainly does have an impact on the world’s economy, measured in terms thatChina is already the second largest economy. I don’t know what the latestforecast is, but within several short number of years, China will become theworld’s largest economy in real terms. And China is increasingly involved in internationalinvestment flows, and markets open, China is already involved in trade flows, sowhat happens in China is what happens in Chinese currency, of course it is veryimportant for the rest of the world.
Q:We all know thatleadership of Federal Reserve and PBOC has both changed recently, Powell hascome to his power, so what do you think of financial trends of China and the USwill be like? And the trends of financial policies of these two countries willbe like?
A: I think it willbe very interesting. Talking about the United States, as you know, we have anew chairman of Federal Reserve, we have new people in the US treasury, and Ithink it remains to be seen whether the financial regulatory policy of theUnited States will remain the same or will go in very unfortunate direction. Wehad some amounted new regulation put in place, following 2007 to 2009 financialcrisis, that regulation was not perfect by any means, I think the effort byTrump administration and many member of the Congress to remove some of theregulations is very wrong-headed, that is likely to open the way for the kindsof abuses with the banks and even what we call the Shadow Banking System. Stoodthe high crisis we had 10 years ago, I hope regulation is not relaxed in thatway.
Now China is adifferent Case, China has different problems and different structure. I thinkthe need for vigilance is real, looking at what happened 10 years ago shows theneed for serious regulation. There was a view associated with people like AlanGreenspan, for example, the financial system is self-regulating, and I thinkmany of those view was wrong before, but for anybody who didn’t know those viewwas wrong, he should have learned it was wrong from the crisis. The attempthere to roll back regulation is wrong-headed, I hope other countries do notmove in that direction.
Q: You know, Chinesepeople pay much attention to the Fed’s policy, so how much do you think China’seconomy is linked to the policy of Fed?
A: Oh, that’s avery good question.
Q: Many people areafraid that China’s economy will be influenced by Fed’s policy of interestrates.
A:I think that istrue, behind what you said is a valid point that the dollar plays adisproportionate role in the world’s financial system, therefore when theUnited States raises interest rates, then interest rates around the world willgo up, I think that is very true. So from perspective of a country like China, Ithink that means that the task which I indicated before, getting the bad debtproblems under controls is all the more important, because those debts that arehard to service today’s interest rates will be even harder to service wheninterest rates go up.
Q: Will there beany conflict between China and the US? Regarding the financial fields?
A: No, I don’tthink so. Country’s interests are not 100% aligned, that never happens, becausecountries have different production bases, different demand bases and so forth,I don’t see there is any need to believe that there is an inevitable conflict.