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8 key points from China’s central bank governor on its monetary policy, yuan pricing and economic reforms

The People’s Bank of China governor Zhou Xiaochuan on Friday held a press conference at the G20 meeting of central bank governors and finance ministers in Shanghai. We give you eight key takeaways from Zhou

PUBLISHED : Friday, 26 February, 2016, 3:09pm
UPDATED : Monday, 27 June, 2016, 11:51am

1. China won’t devalue yuan to boost exports

“We oppose boosting competitiveness in exports through currency devaluation. China’s exports have remained strong with a large amount of net exports, and the trade surplus has reached about US$600 billion. So we will not boost competitiveness in exports through currency [yuan] devaluation.”

China’s move in August to devalue the yuan sparked criticism that it was an attempt to boost the country’s exports. But Zhou dismissed the speculation.

Despite the central bank governor’s optimism, China’s trade has been slowing as weaknesses in the global economy linger.

January exports fell 11.2 per cent in US dollar terms, far steeper than the 1.4 per cent decline in December.

READ MORE: We won’t boost trade by devaluing currency, says China’s central bank chief, amid market jitters over falling value of yuan and slowing economy

But the month’s trade surplus reached a record high of US$63.3 billion as imports also dropped 18.8 per cent.

The weakening trade was as a result of lacklustre external demand, and significant improvement in China’s exports was not expected in the short term, analysts said.

2. US dollar still matters most in yuan pricing

“Our saying [on the yuan fixing mechanism] is that we take a basket of currencies into reference. That means the daily midpoint price is set with reference to the previous close of foreign currencies. The weighting of the US dollar in the basket of currencies remains the largest.”

China may have scrapped its de facto US peg in August, but the US dollar still plays the biggest role among other currencies in the pricing of the renminbi’s exchange rate.

On August 11, China stunned the world by devaluing the yuan by nearly 2 per cent against the US dollar.

That same day, the central bank announced that the system for setting the daily midpoint of the currency exchange rate would be based on the previous day’s close, foreign exchange supply and demand, as well as the rates of major currencies.

Still, it remains unclear exactly how the yuan rates are set.

3. China aware of “relatively high” debt-to-GDP ratio

“The Chinese government is highly alert to the debt problem. The debt/GDP rate is relatively high and has continued to rise and we should be highly vigilant.”

That was Zhou’s response to questions about the risks of China’s high debt level – including household, government and corporate debts.

Some were concerned that the debt-to-GDP ratio would reach 250 per cent.

The market has long questioned China’s debt risks. Some rating agencies have warned that the issue could endanger the country’s sovereign rating, while economists say the mounting debt would become a time bomb for its economy.

The combination of China’s general slowdown in economic growth and January’s surge in new credit may have further increased its overall debt ratio.

But Zhou said there was no a specific standard to measure the risks.

4. Personal mortgage loan encouraged

“In China’s situation, the share of individual mortgage loan in total loans is relatively small; in many other countries, the share of housing loans could be as high as 40-50 per cent of total loans, but the share is less than 20 per cent in China – a relatively low level. Therefore, banks also feel that individual mortgage loans are relatively safe with potential to grow.”

Asked if China’s January lending spree and lower mortgage loan downpayment requirement were running against its “de-leveraging” goal, Zhou said leverage ratio in terms of personal mortgage should be increased.

It was another clear message from the PBOC that personal mortgage loan should be encouraged and increased.

Zhou said the lower mortgage downpayment requirement was still “prudent” enough as the bad loan ratio in mortgage lending was much lower than other loans, such as those to businesses or property developers.

China also intended to give banks greater autonomy in deciding what lending policies they to take for various clients, he said. The central bank would watch the banks’ “overall health situation”.

A unified nationwide requirement had its advantages, but there are shortcomings too, the PBOC governor said.

“China is such a big country with a different situation from province to province, and differences in big cities, medium-sized cities, and third- or fourth-tier cities; every city is different. If banks have no flexibility at all with lending conditions being decided in Beijing, this practice has its shortcomings,” he said.

China would focus its de-leveraging efforts on the corporate sector, Zhou said.

“From a macro perspective, if China wants to control leverage ratio, it should control the overall leverage ratio, and the key is about how to address excessive leverage in corporate sector. Meanwhile, some people are concerned about whether leverage ratio at local governments is too high. From the overall view, leverage ratio of individuals or consumer loans is not high,” he said.

5. Policymaking to give more consideration to domestic economic situation than capital outflow

“For domestic monetary policy, it is more important to consider the overall economic situation, not too much focus on external economy or capital movement, to decide economic policies.”

Monetary policy should focus mainly on supporting domestic growth while changes in capital flow were not a key factor in the central bank’s policymaking decisions, Zhou said.

China has seen huge capital outflow since late last year amid growing concerns about the slowing economy and strong depreciation pressure on the yuan.

In light of this fragile market sentiment, the PBOC has refrained from cutting bank’s deposit reserve ratio or cut benchmark interest rates, so as to avoid sending a strong policy signal that would refuel market panic.

Zhou said economic policies should ensure sound economic growth, which would inspire confidence in China’s economy and structural reforms. Volatility in capital flow would thus not be a big problem, he said.

Zhou also said the PBOC was setting up “an interest-rate corridor” now that it was focusing more on using price tools in its monetary policy.

“In the past, the median of the corridor was based on benchmark interest rates. But now we rely more on the rates carried in the central bank’s open-market operations,” he said.

The PBOC is now conducting its previously bi-weekly open-market operations with banks every day. The move allows the central bank more flexibility to meet banks’ funding demand to prevent big swings in market rates.

6. Problems exist in financial regulatory framework, but any change to regime “still being researched”

“China’s financial regulatory system has had some unsatisfactory performances during crises. In particular, the financial markets turbulence in 2015 forced us to rethink how to adjust the system. At present, the issue is still at the stage of research.”

Asked about his view on the “optimal financial regulatory framework”, Zhou said China saw problems in its regulatory system but that any plan to revamp it was still being studied.

Zhou’s comment indicated that the long-talked-about merger of China’s financial regulators – namely the People’s Bank of China, China Securities Regulatory Commission, China Banking Regulatory Commission and China Insurance Regulatory Commission – would not be realised in the short term.

A key consideration was whether a new system would facilitate macro-prudence policy implementation, Zhou said, adding that many other countries were also trying to improve their financial regulatory systems but that there was no unified model.

He said the G20 had agreed on a macro-prudence policy framework to manage crises, including enhanced financial supervision and counter-cyclical management.

7. Reforms to be implemented decisively in spite of risks

“There are increasing challenges as China and other economies have launched various reforms. In the financial market, the major efforts are to maintain balanced prices in the foreign exchange market and avoid bubbles in other markets. We should be more cautious in setting monetary policies, but at the same time, we can’t be bound hand and foot. Some reforms, such as the supply-side reform, should be carried out decisively.”

Uncertainty in the world economy had fuelled concerns over systematic risks to the global financial system, Zhou said. Policies should hence be well-designed and precautionary measures taken to ward off such risks.

The monetary policy of any economy was bound to see spillover effects to other economies, Zhou said, but he was not too worried about volatility in China’s financial market as the fundamentals of its economy remained healthy.

Still, the central bank should be cautious, he said.

China aimed to retire industrial overcapacity, relieve companies’ tax burdens and cut red tape under the supply-side reform initiatives endorsed by the top leadership, he added.

8. Central bankers around the world should improve communication

“Because of the rise of globalisation over the past two decades, the spillover effects of major economies’ monetary policies have become a focus. Although it’s the policy of your own country, it will have an impact on capital flow and result in arbitrage trades. Every country’s monetary policy is set according to one’s own economic conditions, but we should keep each other informed and strengthen communication.”

The G20 and the Basel’s governors’ meetings offered central bank officials communication opportunities, Zhou said. They could also meet at other global financial forums, he said.

China was criticised for its lack of transparency in its yuan-fixing mechanism, after the PBOC devalued the currency by nearly 2 per cent in August.

Marketwatchers have also urged China’s central bank to enhance its communication with the world.