Q&A on China’s Monetary Policy and Financial Reform
The People’s Bank of China (PBOC) announced on March 16 that it had re-appointed Zhou Xiaochuan as the chief of China’s central bank, making Zhou the longest-serving central bank chief since the establishment of the People’s Republic of China. The re-appointment of Zhou, who has held the position since 2002, signals the country’s bid to ensure policy continuity amid current global uncertainties, while deepening the country’s on-going financial reform.
Before the reassignment, Zhou and three other deputy governors of the PBOC attended a press conference regarding China’s monetary policy and financial reform on March 13. Selected questions and answers from the press conference can be found below.
Q: What kind of monetary policy will China’s central bank adopt?
A: China’s monetary policy mainly seeks to accomplish the following four objectives:
* Keeping low inflation
* Facilitating economic growth
* Encouraging employment
* Balancing international payments
* Where the four objectives are unable to be accomplished simultaneously, the central bank needs to adopt a monetary policy that can draw a balance among the four purposes.
In the Government Work Report presented by Premier Wen Jiabao, he suggests the country set its 2013 GDP growth at 7.5 percent, and the target for inflation (as measured by the CPI) at 3.5 percent. Meanwhile, the broad money supply (M2), which covers cash in circulation and all deposits, is suggested to grow by 13 percent.
The proposed growth of M2 is lower than that of last year, indicating that the monetary policy will stay prudent and neutral, and meanwhile, the government will put more emphasis on keeping consumer prices stable.
Q: Will China’s M2 growth present an inflation risk?
A: Countries with high savings rates and a heavy reliance on indirect financing usually have high M2 growth, which is the case with China. However, the high M2 to GDP ratio will not necessarily create an inflation threat. Japan, for instance, has an even higher ratio than China, yet still suffers from deflation rather than inflation.
For the central bank, stabilizing consumer prices is its first priority, the M2 figures will not necessarily put consumer price stability in jeopardy. If the growth of M2 can be controlled at a reasonable level, it won’t lead to sudden price hikes.
Q: Will the central bank support Taiwan to become an offshore RMB market?
A: The People’s Bank of China and the currency administration institution of Taiwan signed the Cross-Straits Cooperation Memorandum in Currency Settlement on August 31 last year. According to the Memorandum, financial institutions on both sides could undertake currency settlement through a correspondent bank or a clearing bank. The two sides may also discuss a currency swap agreement if cross-Strait trade demands a higher level of financial cooperation.
However, whether Taiwan will become an offshore RMB center needs to be decided by the market. Some important financial centers might become offshore RMB trading markets in the future as a result of market demands and competition.
Q: Will the central government provide a better environment for the opening of capital accounts? Are there going to be any adjustments on the opening schedule?
A: The Global Financial Crisis has created a special opportunity for the rapid growth of the cross-border usage of RMB in trade and investment, which is mainly due to a confidence crisis with the world’s major currencies, and closer regional cooperation between China and other economic entities.
With the development of cross-border usage of RMB, there will be greater demand for the exchangeability of RMB under capital accounts. However, making the RMB convertible under capital accounts is quite complicated. China has been pursuing the free exchange of RMB since 1993. Currently, the RMB has become convertible under current accounts, and its convertibility under capital accounts will be promoted step by step.
It is also important to notice that the convertibility of RMB under capital accounts will not only help promote RMB internationalization, but will also boost the development of an open-market economy in the country and strengthen confidence of domestic and foreign investors in the Chinese currency.