In a People's Daily interview published on Tuesday, Zhou Xiaochuan, governor of the People's Bank of China (PBC) -- the nation's central bank -- shared his views on monetary policy, interest rates, housing loans, banking scandals, restructuring of state-owned banks and foreign exchange.
This year's financial and monetary policies have several major goals, according to Zhou. The first is to improve economic and financial trend forecasting and indirect macroeconomic responses. Monetary policy tools are being applied to ensure the stable and rational growth of money and loan availability, while the loan structure is being optimized. Foreign economic and financial situations are being closely monitored to maintain the balance of international payments. Finally, withdrawals of financial institutions from the market will be dealt with properly to ensure financial system stability.
Monetary policy. The PBC has established a prudent monetary policy to prevent inflation and systemic risks.
However, said Zhou, inflationary pressure has not been fundamentally relieved. Price hikes for public utilities like water, power, fuel and urban transportation and high costs for domestic and some imported raw materials as well as oil all have an impact on the domestic consumer price index.
Interest rates. On October 29, 2004, the central bank announced that it was raising interest rates for the first time in a decade. For individual investors, the rate has been in negative territory since the CPI began running at a higher rate than interest on deposits.
Some pundits believe that China will make a series of small interest rate hikes. Zhou denied this, saying that since China is still in the process of converting from a planned to a market economy, it has no clear economic cycles like those of mature market economies.
"The central bank will closely monitor changes in the economic and financial situation, timely analyze macroeconomic indicators ... and then decide whether we need raise interest rates," he added.
Zhou pointed out that savings interest rates are not positive all the time, and maintaining a positive savings rate is not the sole target of policymakers. He also noted that the short-term CPI has obvious seasonal characteristics that limit its usefulness in deciding interest rate adjustments.
Further, high interest rates run counter to a policy of consumption expansion. In his government work report read at the Third Session of the 10th National People's Congress earlier this year, Premier Wen Jiabao reiterated that the government is seeking to increase the proportion of consumption-led growth in the nation's overall economic expansion.
Housing market risks. The central bank announced on March 16 that commercial banks should scrap preferential rates for individual commercial housing loans and raise the down payment to 30 percent in cities where house prices are rising too rapidly.
"It will generate risks if the sharp rise in housing prices is not regulated," Zhou warned, saying that the soaring price harms the interests of future homebuyers and renters.
He said that the policy sends a signal of risk to consumers and gives them a reasonable expectation for future prices.
"We shouldn't think that the individual housing lending rate must remain unchanged or always kept at a low level," Zhou said. "It is actually floating and adjusted yearly in accordance with the economic situation."
He also warned of the risk potential in the booming market for individual housing loans. Excessive optimism and lax management could lead to serious problems.
Zhou said the new policy was established to encourage commercial banks to strengthen risk awareness and to base their loan policies on in-depth research and calculation of liabilities, expenses and medium- or long-term defaults.
National commercial banks now have a great deal of flexibility in setting their lending and down payment rates. Interest rate adjustments, if they are possible in the future, will also be applied to the housing market, said Zhou.
Interest rate liberation. In recent years, the PBC has been steadily promoting market-oriented interest rate liberation. Two big steps were taken last year: on January 1, the PBC gave financial institutions wider variability in the lending interest rate; and on October 29, it loosened controls on lending and deposit interest rates of commercial banks to allow them to float.
Last year's adjustments met the short-term reform objectives in terms of policy and no other such moves will be taken in the near term, said Zhou. The commercial banks still need to enhance their ability to price loans according to risk factors and costs.
The central bank will maintain its restrictions on lowering the lending rate and raising the deposit rate for some time, since their removal would lead to unfair competition when some banks do not have strict financial and asset restrictions, said Zhou.
Bank reform. Some commercial banks have recently been embroiled in fraud and embezzlement scandals. Such cases will not affect the overall reform of state-owned commercial banks, according to Zhou. Instead, they can use the opportunity to learn some hard lessons about the problems that must be corrected in their operations through the ongoing reform.
Two of the Big Four state-owned banks -- Bank of China (BOC) and China Construction Bank (CCB) -- were chosen for pilot reform and conversion to joint stock banks. Both have seen many improvements in governance, according to Zhou: the basic framework of modern enterprise management has been established; internal controls and risk management have been strengthened; personnel and incentive mechanisms have been reformed; credit management has improved; and shareholders' interests are gaining attention.
However, improvements do not mean all the problems have been solved. Zhou stated that the reform necessarily entails the exposure of problems and corporate governance will not be improved overnight.
When and where to list the BOC and CCB will be determined by their boards of directors, the capital market and the opinions of their intermediaries. The two banks have basically met the major criteria for listing, said Zhou.
Meanwhile, reform of the other Big Four banks -- the Industrial and Commercial Bank of China (ICBC) and the Agricultural Bank of China (ABC) -- will continue.
The ICBC's financial restructuring scheme has been submitted to the State Council and its joint-stock reform will be launched at an appropriate time.
The ABC needs to strengthen its internal control and risk management, and improve profitability and asset quality to create the internal conditions for the joint-stock reform.
Renminbi revaluation. China's foreign trade and the balance of the international payments rather than the trade surplus or deficit of some individual countries will determine changes to the renminbi exchange rate mechanism, said Zhou.
China will steadily and prudently improve its forex rate mechanism to adapt to the new economic environment and maintain financial stability rather than simply revaluing the currency.
As a responsible country, China will take into consideration the impact of exchange rate reform on the regional and global economies, said Zhou.
(China.org.cn by Tang Fuchun and Yuan Fang, March 31, 2005)
