Governor of the People's Bank of China Zhou Xiaochuan made
responses on issues such as the exchange rate of the Chinese
currency Renminbi (RMB) and China's trade balance during an
interview with Xinhua recently. Following are the questions and
Zhou's answers:
Question: What do you think of the fixed
exchange rate of the RMB, a question Mr. Horst Kohler, managing
director of the International Monetary Fund (IMF) and Mr. John
Snow, treasury secretary of the United States raised during their
recent visits to China?
Zhou: China's current unified, managed floating
exchange rate regime based on market supply and demand of foreign
exchange came into existence in 1994. Between 1994 and 1997, the
exchange rate of the RMB against the US dollar appreciated from
8.7:1 to 8.3:1, reflecting the feature of a managed float
regime.
At the end of 1997, at the request of neighboring economies and
international institutions, China substantially narrowed the
floating band of the RMB exchange rate to help reduce the shock of
the Asian financial crisis and dispel the fear of RMB devaluation.
The narrowing of the band should not be seen as a change from float
to fixed regime. China would consider resuming its original band
and improving the formation mechanism of the RMB exchange rate if
there were such a consensus in the region, recognizing that the
Asian crises had been over and their related problems had been
solved. However, views on this issue are different, and many
neighboring countries and economists believe that it is not the
right time to make such a move.
Question: Will China continue to maintain large
trade surplus and high foreign reserves growth?
Zhou: As a central bank, we are clear that the
Chinese government does not pursue trade surplus, but rather aims
at a roughly overall balance in the current account. It is also a
policy followed by the Ministry of Commerce, and the intention of
this government as well.
The government does not pursue rapid growth of foreign exchange
reserves. Since China recorded limited foreign reserves in the
1990s, it was necessary to expand them to be compatible with the
level of import and external debts. The outbreak of the Asian
financial crisis in 1997 led to reconsideration of the appropriate
level of foreign reserves among Asian countries and a higher level
was thought to be desired. China's foreign exchange reserves have
recovered to an adequate level and are no longer expected to grow
at a high rate. With continuous expansion of import and export and
capital inflows to China, we would be comfortable to have a
moderate growth.
Question: Will China be able to achieve a rough
overall trade balance as a policy objective?
Zhou: It is difficult to predict whether China
will record trade surplus or deficit. Unlike many other countries,
China is in a stage of overhaul of its trade regime. It was not
until the end of 2001 that China was accepted as a member of WTO,
which entailed a series of trade reforms. At that time, many people
predicted that China's import would surge and exceed potential
growth of export as a result of substantial reduction of tariff and
non-tariff measures, including import quota and further opening up
of service sector. It turned out that while China's import in 2002
recorded a rapid expansion, export also surged, resulting in a
trade surplus of US$30.4 billion.
In the five years following the accession to WTO, China will
continue to cut tariff and relax quantitative import restrictions,
further liberalize service trade, including financial and
communication sector. All these will increase the difficulty to
forecast current account balance. Since the beginning of this year,
the growth of China's imports has accelerated, surpassing that of
exports. In the first half of this year, China's trade surplus
reduced to US$4.5 billion. Estimates generally show that the growth
of imports will be approximately nine percentage points higher than
that of exports this year. With a trend of imports outgrowing
exports, China's trade will balance in a year or two. Based on this
trend, it is too early to judge whether the RMB exchange rate is
undervalued or overvalued. Therefore it would be unwise to make
exchange rate adjustments on such grounds.
Question: Is it possible to address Sino-US
trade imbalance by means of exchange rate?
Zhou: It is known that a country's exchange
rate is related with its balance of payments. However, it depends
on the country's overall trade balance rather than on bilateral
trade balance. Bilateral trade balance may be affected by
structural, policy and other factors. International trade theories
and WTO spirit call for multilateral-trade balance rather than
bilateral trade balance.
Given the two countries' existing economic and trade structure,
the United States would continue to have big trade deficit with
China, even if China achieved an overall current account balance
through changes in trade and currency policies. The US trade
deficit may be attributable to structural imbalances and fiscal
deficits in the United States rather than the RMB exchange
rate.
Question: Will China take more of developments
of the world economy into account when setting its policies?
Zhou: China's policy making is mainly based on
its domestic conditions, but also takes into account the regional
and global economic conditions. In short, since China is still a
developing country, its impact on the world economy, particularly
the effect of China's trade development on other countries' economy
and employment should not be exaggerated.
The US dollar has weakened since the beginning of this year. In
our view, China might have been informed of its intention in
advance if such a weakening were designed to address the trade
imbalance between the United States and other countries and
regions, particularly its deficit with China. All we knew at that
time was the United States would continue its strong dollar policy,
and it was only some time later we came to realize that the US
dollar was actually allowed to fall. Therefore, it is groundless
for certain people to accuse China of non-cooperation with the
United States in adjusting its balance of payments. How could we
cooperate without being informed of its intention? In fact, the
United State knew all along that the central exchange rate of RMB
is set based on the US dollar, and it should not be surprised to
see the Sino-US trade unaffected by the weakening of the dollar. As
for whether the RMB central rate should be formed against the
dollar or a basket of currencies, that would be a different issue,
which we would be willing to discuss.
Question: What has China done so far to improve
its balance of payments?
Zhou: With a trade surplus and fast increase of
foreign reserves, China has been adjusting policies that may affect
its balance of payments and has taken the following steps to
further open up to the rest of the world.
QFII (qualified foreign institute investor) was introduced last
November.
The policy to launch QDII (qualified domestic institute
investor) has been under consideration for some time. Although its
implementation will largely depend on a consensus, the discussion
per se is a positive sign of moving forward.
-- China is implementing the policy to encourage all kinds of
Chinese enterprises to invest and do business abroad, and relevant
procedures on investment, exchange and remittance have been
simplified.
-- Foreign-funded enterprises have been allowed to raise funds
in the domestic capital market. We welcome foreign investment in
China. However, the investment is not necessarily to be dominated
in foreign exchange. RMB equity financing in China is feasible, if
it is needed.
-- International financial institutions have been permitted to
issue RMB bonds in domestic market. -- Multinational corporations
have been allowed to consolidate operations of foreign exchange
resources of their subsidiaries in different locations in
China.
-- To facilitate travel abroad, restrictions on foreign exchange
purchase by the Chinese travelers have been relaxed with the
indicative limit increased by 2.5 to 3 folds. Extra consumption
expenditure can later be satisfied with late purchase of foreign
exchange.
-- The procedures for travelers to carry foreign exchange out of
China have also been simplified.
-- Domestic assets of emigrants and non-residents can be
exchanged into foreign exchange and repatriated. In the past, only
earnings of the stock, real estate and equity investment could be
changed into foreign exchange and repatriated. We are now working
on the operational procedures for asset transfer.
-- The restrictions on opening of foreign exchange account by
enterprises and the limit on account have been eased since 1994
when the foreign exchange reform was introduced. This relaxation
process was only temporarily halted during the Asian financial
crisis, and now is back on track.
All these measures, designed to make exchange under current
account easier and to liberalize excessive restrictions on capital
account transactions, will serve to improve China's balance of
payments. China will continue to lift foreign exchange control to
balance trade, and gradually make the RMB a convertible currency,
an objective set at the Third Plenary Session of the Fourteenth
Congress of the Communist Party of China (CPC) in 1993. Of course,
we understand it will take a relatively long time.
Question: Is there any specific plan to improve
the formation mechanism of the RMB exchange rate?
Zhou: The reform of the formation mechanism of
the RMB exchange rate is an important item on the agenda of China's
overall foreign exchange reform. Broadly speaking, the current RMB
exchange rate is set based on market demand and supply of foreign
exchange, with necessary intervention to smooth large fluctuations
in the market. With the role of the market becoming increasingly
important, the exchange rate of the RMB will be finally determined
decisively by the market forces and have great flexibility.
With reforms on many fronts unfinished, prioritization,
sequencing and complementality of reform measures remain critical
to success of exchange rate regime reform. A few things need to be
accomplished before adequate flexibility can be introduced in the
exchange rate regime.
First, trade, in particular service trade, is to be basically
liberalized.
Second, excessive, although not all, restrictions on capital
account transactions are to be removed so that the market forces
will play the decisive role.
Third, the reform of China's state-owned commercial banks has to
make substantial progress with major problems being basically
solved. In fact, we have started to reform the state-owned
financial institutions to prevent systemic risks and enhance their
competitiveness since all foreign-funded financial institutions
will be permitted to conduct RMB business by 2006 and their market
access will be substantially broadened as well. Strengthening
competitiveness and risk prevention mechanism will help pave the
way for the state-owned commercial banks to be viably responsive to
the new exchange rate regime.
The above three items are relatively high on China's overall
reform agenda. They must be properly resolved before reform of the
formation mechanism of the RMB exchange rate could be carried out
in great stride, though there could be some flexibility with the
sequencing.
Question: Is it possible to take an earlier
action?
Zhou: We do not consider a narrow float regime
against a single foreign currency the best choice. In our view, it
largely depends on a country's unique situation, and may require
change with time and circumstance. Given the size and development
stage of the economy, the prevailing exchange rate regime has
worked quite well. Of course, it also needs to be gradually
improved. Recently, the speculative talk about revaluation of the
RMB has induced some "hot money" into China. This kind of
speculation is not to be encouraged, for there is too much "hot
money" in the world and they would probably continue to sneak into
China if vigilance is unduly relaxed. Therefore, with a view to
discourage "hot money" speculation, it is wise to re-endorse
stability.
Some people fear that China might have inadequate instruments to
sterilize the inflow of "hot money". I should stress here that the
central bank has the capability to sterilize the liquidity impact
of inflow of "hot money" with additional monetary policy
instruments. The recent rise of reserve requirement ratio was a
clear signal that the central bank was ready to sterilize the
inflow and did not hope to see further increase of "hot money".
This kind of speculation is very likely to fail.
Question: Would a change in China's exchange
rate regime in the future improve Sino-US trade situation?
Zhou: It is difficult to assert whether
balancing China's trade or current account by changing exchange
rate regime would lead to smaller US trade deficit with China. Some
structural analysis might help. In particular, to what extent would
the imports from China compete with or replace the same type of
products made in the United States? The United States is strong in
high-tech products and service export. For example, there are
substantial exports from the United States to China in the area of
transportation, communication and finance and its high-tech
products are most welcome in China. Whether all these advantages
could be brought into play does not necessarily depend on the level
of exchange rate. If we only focus our view on general commodity
trade, we are likely to miss the whole picture. Take Japan as an
example, the Japanese Yen against the US dollar experienced a
persistent appreciation from 360:1 to 250:1, to 100:1 and even to
79:1 at its peak. For the time being, it stands at 116:1. What has
been the impact of the exchange rate of Yen on the US-Japan trade
balance? Some people believe that the exchange rate elasticity of
commodity trade is quite limited, though it does exist, and
commodity trade relates more to production structure and the
existing division of labor.
Question: Could you comment on the concern
expressed by some people about exchange rate impact on
employment?
Zhou: Some people even relate the loss of jobs
in some developed countries to RMB exchange rate. We all know
employment is somewhat politicized as low employment rate affects
election. In our view, each country has to face the issue of
employment in its presidential election and what we need to do is
to identify first domestic causes for the job losses. In fact,
China faces the biggest pressure of employment in the world since
it has to create10 million jobs each year. In particular, China has
a large rural population. A revaluation of the RMB would result in
a decrease of competitiveness of some of China's agricultural
products. It is known that China is a country with large population
but limited arable land. The agricultural sector is labor-intensive
and low in productivity. If an adjustment of the RMB exchange rate
made China's staple agricultural products unable to compete with
imported ones, and thereby force farmers, especially those in the
coastal areas to leave farm land for cities in a much faster speed,
the employment pressure would be more acute in cities since they
have to provide more "non-farm jobs". A one-percentage-point fall
in agricultural employment means a loss of around four million jobs
in the farming industry. Many people only focus on the impact of
exchange rate adjustment on export and employment, in fact, the
pressure is more heavily felt on agricultural imports and migration
of agricultural population. Both text books and international
experience show that unemployment, particularly in large countries,
can be most effectively addressed mainly through structural reform,
including the improvement of labor skills to adapt to international
competition. Trying to divert attention and pressures would not
help solve the problems.
(Xinhua News Agency October 19, 2003)