Yi Gang Says No Yuan Devaluation in Trade War

iFeng: 易纲宣布金融业开放措施及时间表 答记者问(央行官网)
Question: How does China view the normalization of monetary policy in major economies?

A: China currently implements a stable and neutral monetary policy, and has not implemented a quantitative easing policy and zero interest rate policy. With regard to the contraction of the central bank's balance sheet of major economies, we have already anticipated this change very early, so we are fully prepared. At present, the yield on China’s 10-year government bond is about 3.7%, and that on the 10-year US Treasury bond is about 2.8%. The spread between China and the United States is in a relatively comfortable range. Including the overnight interest rate of the money market and the seven-day interest rate, the China-U.S. spread is also within comfort. In short, we are ready to face the normalization of monetary policy in major economies.

Question: Is China currently considering raising the benchmark interest rate?

A: China is continuing to advance the reform of interest rate liberalization. At present, there are still some “double-track” interest rates in China. First, there are still benchmark interest rates in terms of deposits and loans. Second, money market interest rates are entirely determined by the market. At present, we have liberalized the restrictions on interest rates for deposits and loans. That is to say, the interest rates for deposits and loans of commercial banks can rise and fall depending on the benchmark interest rate, and the actual deposit and loan interest rates can be determined according to the commercial bank's own circumstances. In fact, our best strategy is to gradually unify the interest rates of these two tracks. This is what we need to do to reform the market.

Question: After the opening up of the financial industry, will foreign-funded institutions have an impact on domestic institutions and will there be a huge change in domestic financial markets in the next few years?

A: In the process of opening to the outside world, we welcome foreign financial institutions to invest and operate in China. We will treat domestic capital and foreign capital equally. Whether foreign-funded institutions are powerful competitors depends on their own corporate finances, governance structures, and so on. At present, we have increased the shareholding limit, which actually provides an opportunity for the opening of many segments. Although there are corresponding laws and regulations in each subdivided area, our principle is now clear. That is, under the current prudential supervision system, China and foreign countries are treated equally. After a few years, I believe that the Chinese market will be more competitive, the service capabilities of the financial industry will further improve, and it will serve the real economy better in a fair competition environment. Our regulatory environment will also be better and our financial security will be strengthened.

Question: China’s debt-to-GDP ratio has grown very fast. What do you think about this issue?

A: China currently has a problem of high leverage and high debt levels. From the perspective of prudent monetary policy and financial stability, we believe that the primary task is to maintain the stability of the debt level. The second task is to optimize the debt structure and balance government debt, corporate debt, and personal debt. The third task is to make the total leverage ratio more reasonable. Through the above approach, to achieve a beautiful deleveraging.

Question: How do you view Sino-US trade frictions?

A: As the world's top two economies, the trade imbalance between China and the United States is more complicated. I have the following observations. First of all, this is a structural issue. China is at the end of the Asian industrial chain and will import components from Japan, South Korea, and Taiwan Province of China, and export finished products to the United States after processing. The Chinese surplus to the United States actually reflects the surplus of the entire East Asian industrial chain to the United States. Therefore, we should look at the trade balance issue from a multilateral perspective. Second, this is a macro issue. If we look at the equality of national accounts, the left side of the equation is the current account, the right side of the equation is the government deficit, investment, and private savings. Now that the US fiscal deficit is expanding, the bigger the fiscal deficit, the greater the current account deficit. U.S. investment is increasing, the savings rate is declining, and the current account deficit will also widen. According to this identity, the US trade deficit is more difficult to solve. Third, if we look at trade, we must not only look at trade in goods but also look at trade in services. The United States has a comparative advantage in trade in services. China’s trade deficit with the United States has grown rapidly. The average annual growth rate in the past decade has been close to 20%. Last year, the deficit exceeded US$38 billion. After the financial sector is further opened up, the United States can also make better use of its comparative advantage, so the trade in goods and services adds up and the trade relationship between the two countries is more balanced. The last point I want to say is that we need to look at U.S. multinational companies. They sell a lot of products in China and their profits are high, but they are all done through the commercial presence of these multinational companies in China. When we look at the trade imbalance between China and the United States, we do not include this. If we take this into account, it may be more comprehensive. To sum up, we need to carefully analyze and realize that this is a structural problem and it is a long-term problem, so we must resolve it more rationally.

Question: Will China use monetary policy to deal with Sino-U.S. trade issues?

A: China's monetary policy is mainly based on the comprehensive consideration of the domestic economy and it serves the real economy. Our monetary policy and foreign exchange markets are now operating very well. At present, the foreign exchange market is based on market supply and demand, with reference to a basket of currencies to adjust and implement a managed floating exchange rate system. The People's Bank of China has not conducted foreign exchange intervention for a long time in the past. And the current foreign exchange market can serve individuals and companies well, and it can also allow Chinese and foreign companies to easily trade and invest. I think the future foreign exchange market will run better.

Question: What are the benefits of the normalization of monetary policy and the opening up of the financial industry to China's real economy? How can China's banking industry improve its international competitiveness?

A: The normalization of monetary policy and the opening up of the financial industry will definitely benefit the real economy. All our measures are designed to make the financial industry better serve the real economy. These policies are conducive to China's banking industry to enhance its competitiveness in the country, but also conducive to the international competitiveness of China's banking industry after going out.

Question: In September last year, the People's Bank of China tightened supervision over virtual currencies and banned all ICO and virtual currency exchanges. Will the People's Bank of China introduce new measures this year and how will the People's Bank view the blockchain?

A: We do think that the virtual currency has relatively little service to the real economy, and there are some speculative acts and even some money-laundering behavior. Therefore, the People's Bank has been cautious about virtual currency. In fact, in the current global research on digital currency, China is at the forefront. China is studying digital currency, blockchain technology and financial technology to explore how best to serve the real economy and to develop these technologies safely to avoid possible negative impacts. On the whole, our supervision of virtual currency is very strict. At the same time, we are also studying how to use the positive energy of digital currency to better serve the real economy.

Question: Will China be affected by the "liquidity trap"?

A: Simply speaking, China is still far from the "liquidity trap." However, the extreme situation of “liquidity trap” can provide a useful consideration for the formulation of monetary policy.

Question: Is there any new measure for capital account convertibility in China? How to promote the internationalization of the renminbi? After the financial industry is further liberalized, how will the regulatory model change, and will it move toward a "mixed industry supervision" model?

A: We have been steadily promoting the convertibility of capital account. Compared with the past, whether foreign direct investment (FDI), foreign direct investment (ODI), or financial markets, how to allow foreign capital to enter the stock market and bond market, and how to incorporate the Chinese stock index into the world's major indexes, we have been working Do it all. Including the daily quotas for raising Shanghai Stock Exchange, Shenzhen Stock Exchange, and Hong Kong Stock Connect that were just announced, they are actually implementing the convertibility of capital account in an orderly manner, making everyone more and more convenient under the capital account. At the same time, the steps of our reforms are sound, or we must control risks and make the steps smooth. The internationalization of the renminbi is a natural and market-driven process. If enterprises and financial institutions have such needs, the internationalization of the renminbi can save transaction costs and hedge the risk of currency mismatch. We are all happy to see this. However, it is mainly driven by the market. We must make the renminbi and the U.S. dollar, yen, euro and other currencies compete with each other on equal terms so that enterprises can freely choose which currency to use. With regard to supervision, our direction is currently to strengthen supervision, but the basic framework is separate supervision, and the duties of the various regulatory agencies are clear. However, judging from the past years of experience, we must pay special attention to cross-market, cross-product, cross-institutional risk transmission. For example, our major asset management guidance aims to make bank, securities and insurance asset management businesses compete under the same rules and minimize regulatory arbitrage.

Question: What is the supervisory significance of setting up NetLink?

A: The establishment of the Internet Alliance is mainly considered from the perspective of fair competition and security of the payment system. China's third-party payments, including mobile payments and mobile payments, are at the forefront of the world. The whole world is saying that China's mobile payment is very convenient. However, in the course of this development, some risks have indeed been discovered. How to effectively prevent risks while encouraging competition and encouraging innovation is a very difficult issue. We must balance well. Our system design is to work in this direction.

Question: We note that the central bank now regulates market liquidity more through open market operations. Interest rate adjustments seem to be more symbolic. Does this mean that it is gradually adjusting to interest rates from the dual track system of interest rates? At present, the United States is expected to raise interest rates strongly. Will China follow suit? Is the increase in mortgage interest rates last year a disguised rate hike? Will mortgage rates continue to rise next?

A: As far as interest rates are concerned, I just said that China’s monetary policy has always been very robust. We look at our overnight interest rates, seven-day interest rates, and 10-year Treasury yields. When many developed countries implement zero interest rates, our interest rates are still very stable. Since we have a solid foundation, we will remain stable when other countries start normalizing monetary policy. For example, the United States has already raised interest rates six times, but the yield curve of the renminbi has remained 80-100 basis points higher than the US dollar yield curve, maintaining a stable spread. We believe that the current pattern of monetary policy and interest rate spread are generally stable and conducive to China's economic development. Observe whether the policy is stable and whether it is a good policy. First, see what kind of impact it has on the real economy. See how well we finance and how financially support the real economy. The second is to look at expectations, which is how people think about the future. In considering these two aspects of analysis, we are in a relatively modest range.

Question: China may further promote the cross-border capital flow fluctuations in the process of opening up the financial industry. How to manage this fluctuation?

A: At present, cross-border capital flows are stable. As we further promote the opening up of the financial industry, we will consider the issue of capital flows. We hope that capital flows will be stable and it will be conducive to global resource allocation. From the perspective of foreign investors, with the inclusion of Chinese stocks and bonds in the MSCI and Bloomberg Index, foreign institutional investors need to deploy such assets and therefore need to invest in China's stock market and bond market. At the same time, Chinese investors also need to allocate assets globally. At present, the proportion of global asset allocation of Chinese investors is low. With the further expansion of China's openness, the Chinese people and institutions can allocate assets to the world to a greater extent. Given the demand from both domestic and foreign investors, cross-border capital flows can be smooth and efficient.

Question: Has the financial sector liberalization that you announced just now is China's "big bang reform"?

A: Chinese philosophy stresses "gradual" and "gradual." We are very cautious when promoting various policies. I just said that advancing the opening up of the financial industry should follow three principles. First, the management of pre-accession national treatment and negative list; Second, the opening up of the financial industry should be coordinated with the reform of exchange rate formation mechanism and the reform of capital account convertibility. Advancing; Third, while opening up, we must pay attention to the prevention of financial risks, and we must match financial supervision capabilities with financial openness. Therefore, after careful consideration, these measures are only advancing after assessing the conditions are ripe, supervision is in place, and data are in place. We cannot describe it as a big-bang reform

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