Dai reaffirms one country, two currencies

With his distinctive southern Chinese accent, the country's most senior banker stresses that Hong Kong dollars will remain a foreign currency in China after the handover. However, he acknowledges that his southern compatriots are busily accruing them in the bank. Hailing from Jiangsu province, Dai Xianglong, governor of the People's Bank of China, told the South China Morning Post that 'you must make clear in your newspaper that there will be two legal tenders circulating after July 1'. 'But this does not stop our southerners' fondness for depositing a lot of Hong Kong dollars in our banks,' he said. The relationship of the two currencies has been one of the biggest issues dominating his work in the two years since he assumed the post in June 1995. He has since guided China's austerity programme, which has seen inflation slide to an annual 2.3 per cent in the first four months of this year from a post-1949 record of 21.7 per cent in 1994, according to official Chinese figures. The People's Bank of China is a central bank managed by technocrats at the centre of a massive restructuring of the Chinese economy and with an avowed intention to strengthen its regional and global role. Mr Dai, 52, is the first career banker to run the central bank and make fighting inflation its number one priority. He is laying the groundwork to make the yuan a fully convertible currency for the first time since 1949 in what would be a landmark in Chinese modern history. Yesterday, the governor spoke to the Post on a broad range of issues on the domestic economy and relationship with Hong Kong after the handover. HONG KONG: Asked whether he could envisage the need to intervene in Hong Kong's monetary affairs after the handover, Mr Dai said that, as an international financial centre, Hong Kong had the means to guard against the risks inherent in the global financial system. He expressed confidence in the arrangements set up by Hong Kong with other central banks in the region to fend off attacks on its currency. 'After July 1, since Hong Kong will be part of China, the PBOC will have close co-operation with the Hong Kong Monetary Authority,' he said. However, he stressed that at the request of the monetary authority 'we will provide support. This is the case not only with Hong Kong but we have similar arrangements with other central banks, for example with Thailand, to maintain currency stability in the region'. He reaffirmed his confidence in the operations of Hong Kong's financial system, praising its sound laws and regulations and professional expertise and said its position as an international financial hub would be strengthened after the handover. To support his case he pointed to Hong Kong's huge foreign reserves and the Land Fund, estimated at HK$150 billion, saying that this money would enable it to 'stabilise the Hong Kong dollar if necessary'. The central bank is studying a request by small and medium-sized Hong Kong banks which want to operate in China but do not have the required US$20 billion in assets, he said. CHINA'S BANKS: The governor said the Bank of China would not have preferential treatment in Hong Kong after the handover, saying that it must compete on a level playing field with both local and foreign participants in the industry. 'After July 1, Chinese-backed banks will face more rivals and stronger competition,' he said. 'Getting a larger share of the market will depend on the efforts of the Bank of China.' Improving the quality of loans of China's banks is one of the main challenges facing Mr Dai's bank as he attempts to unlock reserves to finance industrial expansion. Outlining his plans to make Chinese banks achieve international debt-equity standards, Mr Dai set a target that 'problem' debts by the four biggest state-owned banks would almost halve to about 10 per cent within four to five years and that the ratio of shareholding commercial banks would tumble to 6 to 7 per cent in the same period. He defined three types of 'problem' loans. One is an 'overdue' loan, unpaid for more than double the initial period. A second is a 'non-performing loan' that has been unpaid for a further three years and the third is a 'bad loan' which has to be written off. These problem loans account for about 20 per cent of outstanding bank lending, with the 'bad' loans accounting for about 2 per cent, Mr Dai said. Any move to dramatically reduce bank indebtedness would accelerate the policy of pushing uncompetitive state firms into bankruptcy and add to mounting unemployment. In order to achieve this ambitious target, Mr Dai outlined a series of measures, including strictly protecting the autonomy of commercial banks to make loans without interference from local governments and subsidies to banks to cover losses made on loans for infrastructure projects. He also said the bank would alter the emphasis of lending towards large conglomerates and reduce the flow to small companies. This, in part, would help overcome costly duplication in manufacturing by small-scale operators. Mr Dai said that the problem loans tied up precious capital, which was forcing the central bank to increase money supply that had the effect of adding inflationary pressure. Despite this, he said the public remained confident in the state banks. STOCK MARKETS: Mr Dai indicated that the flow of Chinese companies attempting to raise capital in Hong Kong would continue as a key element in the mainland's increasing use of stocks to attract fresh capital. 'When mainland firms go to Hong Kong to list, they have to abide by Hong Kong regulations,' he said. 'As to which types of mainland firms will list, the relevant departments of the Chinese Government will decide according to China's industrial policy.' On the subject of domestic stock markets, Mr Dai was positive about the role they were playing in mobilising private capital. However, he repeated the caution expressed by many other leading officials in recent months about the scale of the recent speculative surge. 'We will increase direct financing [of companies], we will accelerate the reforms of firms, develop China's stock markets and encourage people to invest in listed companies,' he said. But he reinforced the determination of the government to crack down on malpractices that have fuelled a rise in the Shanghai and Shenzhen markets to levels widely seen as unrealistic.