At the press conference organized by the Press Center of the First Session of the Thirteenth National People’s Congress on March 9th, Mr. Zhou Xiaochuan, Governor of the People’s Bank of China, Mr. Yi Gang, Deputy Governor of the PBC, and Mr. Pan Gongsheng, Deputy Governor of the PBC and Administrator for the State Administration of Foreign Exchange answered questions from the domestic and international press on the topic of financial reform and development. Here is the transcript:
Moderator: Friends from the press, good morning! Welcome to the press conference of the First Session of the Thirteenth National People’s Congress on the topic of Financial Reform and Development. We are delighted to have Mr. Zhou Xiaochuan, Governor of the People’s Bank of China, Mr. Yi Gang, Deputy Governor of the PBC, and Mr. Pan Gongsheng, Deputy Governor of the PBC and Administrator for the State Administration of Foreign Exchange to answer your questions on the topic.
Reuters: China’s financial deleveraging in 2017 has led to a 0.47-percentage point increase in weighted average loan interest rate for non-financial enterprises. Will the rising cost of financing have any impacts on the economy? Will the PBC follow the Federal Reserves in raising interest rates? Is the Chinese government going to loosen its regulation on capital outflow? Will the central bank completely remove countercyclical factors in setting the CNY central parity rates? Thank you.
Zhou Xiaochuan: After years of lackluster recovery from the crisis, the world is finally witnessing synchronized recovery in multiple regions. Major economies are unwinding their quantitative easing in monetary policy. This is good news as it means that expansionary monetary policies and low interest rates will gradually come to an end. As China is part of the global economy, it is easy to estimate the impact on us.
Zhou Xiaochuan: At the same time, China is shifting to a new growth model. China’s economy is in a new normal now and has been transitioning from a phase of rapid growth to a stage of high-quality development. In the past, growth focused on volume expansion and was stimulated by massive investment. The transition means we will be less dependent on volume expansion.
Zhou Xiaochuan: We should also notice that the broad money is quite large relative to the size of our economy. In transition to a stage of high quality growth, we might reduce the reliance on investment. This means broad money can be used more efficiently, and it does not necessarily lead to tight liquidity. During the transition, while the quantity and pricing of the liquidity may be on the rise, efficiency will be improved and the overall price will be on a downward trend. Under such circumstances, we will make proper policy responses in terms monetary and foreign exchange policies.
Yi Gang: According to our statistics, at the end of last year, the lending interest rate increased 0.4 percentage point year on year. Last year, the CPI and PPI was 1.6 and 6.3 respectively, and the GDP deflator was about the weighted average of CPI and PPI. In this context, the real interest rates have been stable. Despite the 0.4-percentage point rise in nominal interest rate, the real rate was stable and well-aligned with the economy. Supply and demand of liquidity is also balanced.
As for the expected rate hikes by Federal Reserve, our monetary policy decision is made based on domestic economic and financial situations and a result of comprehensive considerations. Also, the cross-border capital flow is balanced. We will continue to push forward the capital account convertibility and keep risk prevention in mind. Thank you.
Pan Gongsheng: You asked about the next-step measures of foreign exchange management. As you know, our foreign exchange market experienced significant shocks and faced with huge risks. Therefore, we took certain macro-prudential measures to make counter-cyclical adjustments on cross-border capital flows. For example, we implemented macro-prudential management on full coverage external debt, required banks to set aside risk reserves on forward sale of foreign exchange, applied normal reserve requirement on the onshore deposits of RMB business participating banks in their correspondent banks, and introduced countercyclical factors to the USD-CNY central parity rate model.
Pan Gongsheng: On the other hand, in mid-2017, the PBC and three other ministries jointly released the Notice on Guidelines of Guiding and Regulating Overseas Investment. China’s overseas direct investment policies are now highly open and transparent. In the past few years, we have strengthened micro-supervision on the foreign exchange market in accordance with current laws and policies of foreign exchange management, focusing on the cracking down on false and fraudulent transactions and underground banks. We have enforced the authenticity reporting requirement for cross-border transfer, and strengthened compliance supervision over financial institutions. It is worth mentioning that these micro-supervision measures will not be altered in response to cyclical changes, and they will remain consistent and stable in different cycles. Thank you.
Financial News: In recent years, China’s financial sector has continued to open up to the outside. The central government said in this year’s Report on the Work of the Government that it would open up the bankcard clearing market, lift restrictions on the business scope of foreign-invested insurance brokerage, ease or remove restrictions on the ceiling of foreign share holding in banks, securities companies, fund asset management firms, futures companies, and financial asset management institutions, and have unified market access standards for both domestic and foreign banks. My question is, what are the specific measures that the PBC will take in further opening up the financial sector? Thank you!
Zhou Xiaochuan: As you said, regarding market access, we have prepared for the reform for many years. Since the late 1990s when we were preparing for the accession to the WTO, we thought about opening up market access, but the process was slowed down due to the Asian financial crisis. After China became a member of the WTO, progress was made in market access to a certain degree. And as greater access was planned several years after our WTO accession, unfortunately the global financial crisis broke out. Now that we have entered a new era, it is reasonable to make bolder moves to further open up our market.
Zhou Xiaochuan: Opening up is a broad concept that is not only about allowing foreign institutions to do business in China, but it is also about Chinese financial institutions going to the global market. In recent years, Chinese financial institutions have established branches and subsidiaries around the world and expanded their operations. There is friendly cooperation and competition between Chinese financial institutions and international counterparties. An important factor behind these changes is RMB internationalization, which facilitated the overall opening up of the financial sector. Of course, in addition to international use of RMB, there are further important opening up measures in other areas of financial market.
Zhou Xiaochuan: In the past five years, we’ve established the Shanghai-Hong Kong Connect, followed by Shenzhen-Hong Kong Connect and Bond Connect, all of which as measures of opening up in the financial market. By taking these measures, China has made solid progress in RMB convertibility, and we expect this to continue. From the policy perspective, we have conducted researches on most of the policies that ought to be studied and are looking for opportunities to gradually move forward. Opening up is a process that entities, financial institutions and market participants can learn to be more sophisticated in an open environment, figure out and play their roles, and take part in international competition.
Yi Gang: I would like to make two comments. First, the Central Committee of the CPC and the State Council give priority to financial opening up. It was pointed out in the Report of the 19th CPC National Congress that Openness brings progress, while self-seclusion leaves one behind. We have to take it into action. President Xi stressed at the 16th Session of the Central Leading Group on Financial and Economic Affairs and the 5th National Financial Work Conference that further opening up in financial sector is an important part of the opening up policy, we will make active and steady arrangement on it, and properly set the priorities. The PBC and the financial institutions will earnest follow the overall arrangements of the Central Committee of the CPC and the State Council and implement measures to open up the financial sector.
Yi Gang: Second, we will ease or lift restrictions on the share of foreign equity in financial institutions. This is to reduce the discriminative measures against foreign institutions and to give equal treatment to overseas and domestic institutions. It does not mean to ease regulation. Foreign institutions are subject to prudential supervision when they plan to enter the market or start operation in China. Therefore, we are still able to effectively prevent and resolve financial risks and maintain financial stability by strengthening financial regulation and improving regulatory mechanism. Thank you.
China Radio International and CRI Online: The PBC recently released the February foreign exchange reserves statistics. Why was there a sudden drop in the reserves after growth that had lasted for over ten months? Does this mean there will be big changes in the foreign exchange market? Thank you.
Zhou Xiaochuan: There is a lot to talk about when it comes to accounting of foreign exchange reserves. First, our foreign exchange reserves figures were USD equivalent. We have long suggested that countries should use SDR equivalent in the future; the USD equivalent of Euro, Japanese Yen, or none-dollar denominated reserves would fluctuate as US Dollar exchange rate goes up and down. You have notices the recent volatility of USD which was caused by US domestic policies, and it appreciated moderately. In turn this has led to a decrease in the USD equivalent of Yen and Euro denominated reserves. That is a factor to explain why total foreign exchange reserves went down.
周小川：第二，在外汇储备中，有很多项目按照当前的会计准则都是叫“盯市”（mark to market）计算，外汇储备投资的债券、股票和其他的这一类资产，它会随市场变化发生价值变化。大家知道前一段时间，可能有一些资产涨得很厉害，涨到头以后就会有下跌，一旦下跌的时候，按照“盯市”法计算的时候，储备数量就有所减少。这可能是最近变化的最主要因素。当然，可能还有一些其他的因素。但是，从中国国际收支平衡和外汇形势来讲，都没有任何重要的变化。
Zhou Xiaochuan: Second, many items of the foreign exchange reserves are using “mark to market” value based on current accounting standard. So the market value of bonds, equities, and other assets in the foreign exchange reserves invested portfolios can be quite volatile. As we all know, starting from a while ago, some asset prices plunged after soaring to recent highs. Once the prices went down, the mark to market value of foreign exchange reserves shrank. This is probably a key reason of the recent volatility. There may be other reasons as well. However, from the perspective of BOP and foreign exchange fundamentals, there is no significant change.
Pan Gongsheng: Governor Zhou’s explanation is very clear. After declining to USD three trillion in January 2017, China’s foreign exchange reserves rose modestly for 12 months and went down slightly this February. According to the latest data released the day before yesterday, it dropped USD 27 billion on February.
The reasons are as Governor Zhou explained. First is exchange rate fluctuation, the USD index lost 1.7% in February. Second is asset price volatility. International bond price index declined, and stock markets in US, Eurozone, and Japan plunged 4% to 5%. These are the two major factors in the drop of foreign exchange reserves in February. Looking ahead, we expect the fundamentals of China's economy to remain sound with positive signs, and the RMB exchange rate will remain stable while moving in both directions. Thus, we have a good chance to keep foreign exchange reserves stable in the future.
外文局中国网记者：我的问题是，在推动人民币国际化方面，今年会有哪些主要举措？谢谢。
China.com.cn: What measures will be taken to advance RMB internationalization this year? Thank you!
Zhou Xiaochuan: Our policy research has covered all the policies that we can possibly cover. RMB can be used in international trade and investment now, and has been included in the IMF’s SDR currency basket. All the major steps have been taken. I should say that it will take some time before market participants readily choose RMB in trade settlement, investment, and asset denomination, including the denomination of main commodities and reserves. Nobody is in a position to force them to use our currency, as this is a decision for them to make based on their own considerations. Thus, going forward, a progressive process will unfold.
Zhou Xiaochuan: As for what measures the government or the PBC can take to facilitate the process, I think, first, we can do something to build better connections between China’s capital market and major global capital markets. There has been ongoing progress in this area in recent years. Second, apart from capital markets, connections in other parts of financial markets will be strengthened, too. In addition, we are steadily advancing capital account convertibility, step by step. After convertibility, the few remaining restrictions will also be lifted gradually. Then, RMB internationalization can be further advanced. Thank you.
Bloomberg News: In the new regulatory structure, what role will the PBC be? Will the central bank consider a UK model? Also I’d like to ask a second question. Last October, you warned against the complacency and certain financial risks, which you said were hidden, complex, sudden, contagious, and hazardous. Since then, one of those risks, the outstanding debt, has only increased at a slower pace. This morning we saw some news data showing aggregate financing of 11% again. As you prepare to step down, how would you assess those risks now? And would you say that enough is being done to ward off the problem that you said could happen? Thank you.
Zhou Xiaochuan: You asked quite some questions. The financial regulatory structure reform is still underway. During the last days of the National People’s Congress this year, the delegates might exchange views on the national institutional reform, including further reforms of financial institutions. In fact, some key components, and what has been disclosed in the 2017 National Financial Work Conference, already holds the clue to what the financial reform is about. The subsequent establishment of the Financial Stability and Development Committee under the State Council, whose office will be set in the PBC, among other facts, shows that PBC will play important role in the new financial regulatory structure. Based on my understanding, currently the PBC should play roles in the following areas. First, filling the gaps of the financial regulatory structure, those gaps require urgent treatment. Second, there are flaws in the financial regulatory rules and regulations, we should strengthen the rule making for the financial sector. In addition, rapid action should be taken to resolve the risks that have already occurred at financial or quasi-financial institutions, in order to maintain the sound function of the financial system.
Zhou Xiaochuan: There is one thing that the PBC must take the lead, strengthening and improving the efficiency of the coordination among financial institutions, especially financial regulatory authorities; this is one aspect of the institutional reform. You will get a better picture when further measures are announced for the financial institutional reform. Of course, our institutional reform is based on China’s current conditions, and we also learned from international practices of the organizational structure in financial regulation, including the “twin-peaks” regulatory framework used in the UK. But that doesn’t mean that we have decided to adopt the “twin-peaks” model. We should wait and see.
Zhou Xiaochuan: Regarding China’s aggregate debt, as you can see, rapid debt growth have stabilized and moderated. We have reached the stage of stabilizing leverage ratio, in which the growth of broad money is already slower than that of nominal GDP. This is an indicator of stabilized leverage and gradually deleveraging at the aggregate level. Of course, you can monitor various indicators during the process, one of which is the shrinking of shadow banking due to actions taken by PBC and regulatory authorities. While we reduced the scale of shadow banking, some shadow banking businesses may have returned to the balance-sheet of the banking system. As we have observed, the growth rate of debt financing varied across categories, some of which is even negative. It is not plausible to pick out one indicator that has gone upward as the proof of rising leverage. In fact, we are already in the stage of stabilizing leverage and gradually deleveraging, as can be observed by many. And this trend is clear. Thank you.
The Paper News: Since 2017, the housing credit policy has tightened in many cities. Recently, there are complaints about constraints in personal housing credit limit and higher interest rates. Could you tell us if there will be new changes in the housing credit policy this year? What is the state of financial risks in the real estate industry? Thank you.
周小川：请潘行长回答。
Zhou Xiaochuan: I’d like to invite Deputy Governor Pan to answer these questions.
Pan Gongsheng: You asked several questions about the real estate industry. The first is about housing loans. Recently there are media reports about housing loans and the mortgage rates, saying that mortgage loans increased by 4 trillion yuan in 2017, or 22% yoy, while the total RMB loans increased 12.7%. This January saw a 21.4% year-on-year increase in mortgage loans, and 13.2% in total RMB loans. The growth rate of mortgage loans is nearly 10 percentage points higher than that of total RMB loans. Despite the moderation in growth of mortgage loans in 2017 and January, they still experienced relatively rapid growth and can satisfy reasonable market needs. In some cases, due to the mismatch of asset and liability, some individual banks may have a longer period in loan approval and extension. I think that is possible.
Pan Gongsheng: With regard to the mortgage rates, it is indeed going up slightly. But from a longer-term perspective, it is still relatively low. Considering the upward trend of interest rate in the liability side and risk premium of the real estate industry, commercial banks independently set the pricing of mortgage loans and expand the floating range. Such a move is in tandem with the trend of interest rate liberalization. In this regard, the PBC will urge the commercial banks to strictly implement differentiated housing credit policies, and use differentiated pricing to support reasonable needs from household, especially from new city-dwellers.
Pan Gongsheng: The second question is about the risk of real estate finance. The PBC has always implemented a prudent housing credit policy. The overall quality of real estate loan has been sound, and financial risks in the real estate industry are within control. Here are some numbers: the banking industry’s NPL ratio of real estate loans is less than 1%, while the overall NPL ratio is 1.85%. If you exclude policy banks, the NPL ratio will drop to 1.74% from 1.85%. Obviously, the real estate loans have a lower NPL ratio than that of the total lending, within which the NPL ratio of mortgage loans is just 0.3%. We have been taking a prudent policy stance towards housing credit, and the average down payment ratio is over 33%, last year the average down payment ratio for newly issued mortgage loan reached 37%. This is quite prudent even from an international perspective. Of course, we have noticed growth of mortgage loan and household leverage may be a little too fast, and certain real estate enterprises might be somewhat risky. We are closely monitoring.
Journalist: Some think that the financial reform slowed down in 2017, and this is believed to have something to do with risk prevention. Risk prevention is still an important theme for the financial sector in 2018. Will this be reason for concerns that risk prevention can bring financial reform and development to a stall or onto a slow lane? Governor Zhou, what’s your take on this? Thank you.
Zhou Xiaochuan: It is well recognized that the financial sector, especially banking institutions, operate on high leverage and focus on risk management. As a result, good risk management is an important factor to facilitate industry development and fundamental in the ability to serve real economy. Effective risk prevention facilitates sound development and good service. Therefore, risk prevention and crisis prevention are always key parts of financial reform. In my opinion, risk prevention and reform do not go against each other, rather they support each other. As you can see from the global experiences, it is risks and crises that led to new measures and policies. Likewise, some major Chinese financial reforms were initiated in the context of Asian Financial Crisis, as the turmoil prompted us to identify risks and flaws and roll out that reform. The same holds true for the Great Financial Crisis. So we see risk prevention as part of reform. One important component in 2017 was that after President Xi delivered an important speech and announced major arrangements at the National Financial Work Conference, the Financial Stability and Development Committee was established under the State Council, an effort to prevent risks and strengthen regulation. And strengthening regulation is also an important part of financial reform.
With more effective regulation and lower risks, we can take bolder and quicker actions in other aspects of reform, including RMB internationalization and easing market access, as you just mentioned. All of these are related to regulatory reform. Thank you.
Shanghai People's Radio: It is noted that the Report on the Work of the Government this year stated, “Our prudent monetary policy will remain neutral, and its stance, i.e. the tightness or looseness, should be appropriate”. “its stance, i.e. the tightness or looseness, should be appropriate” is a new expression. What is your advice to the market participants to understand this expression? Thank you.
周小川：请易纲同志回答。
Zhou Xiaochuan: I will pass this question to Mr. Yi Gang to answer.
Yi Gang: The statement regarding prudent monetary policy, appropriate tightness and looseness is aimed at supporting the real economy by financial and monetary policies. Based on our understanding, China's economy shows positive signs with stable performance recently. We can estimate whether monetary policy is tight or loose from several perspectives. First is credit support to the real economy, to the micro and small enterprises, to the agricultural sector, farmers and rural area borrowers, and some weak links. Second is the support to innovation. There are many highlights of innovation in China's economy. Whether those areas can receive prompt support from various financing channels, such as money, credit and equity markets, shall be taken into account. Meanwhile, we should be aware of financial risks prevention and keep a keen eye on financial reforms as previously mentioned. As a result, whether the policy stance is appropriate in terms of easing or tightening should be based on its support to real economy. Could it support the real economy from multiple dimensions? Could it create a healthy external environment to prevent risk and facilitate financial reform, thus providing a neutral and appropriate monetary financial environment in accordance with the transition from rapid growth to high-quality development?
Yi Gang: The liquidity also should be stable and appropriate in terms of tightness and looseness. We are monitoring various liquidity indicators to measure if it is appropriate, such as market interest rates, excess reserve ratios. Those indicators being in the reasonable ranges are important factors.
Yi Gang: In addition, as stated in the Report on the Work of the Government this year, broad money M2 and aggregate financing to the real economy (AFRE) need to grow at reasonable rates without specific numbers and indicators defined. This is a pronounced change. We used M2 as a major indicator for a long time, and it played positive and important roles. But we should be aware of the changes, that is, the market development and financial innovation, and the co-relation between indicators like M2 and economic trends are no longer significant. As a worldwide phenomenon, M2 is less effective as an economic forecast tool. In recent years, items other than loans on the balance sheet of commercial banks have impacts on M2, which is witnessed in other countries as well. Therefore in many countries the prominence of M2 as an indicator is on the decline, especially as an indicator for forecast. Recalibrating the coverage of M2 cannot fully address the problem because its decreasing relevance is a general trend. Therefore, facing new issues and new situations, to achieve high-quality development in the new era, we should emphasize even more on better use of the existing resources, optimize the money and credit structure. It is from these broader perspectives that we consider reasonable growth and the appropriate stance of monetary policy to support growth. Thank you.
CCTV, CCTV.com, and CCTV News: Two hours ago, the PBC released that the M2 growth rate was 8.8% in February. Growth of M2 has been single digit for ten consecutive months. The Report on Government’s Work 2018 mentioned M2 but didn't give a specific ratio. How should we the growth rate of M2 in the future? What is a reasonable growth? How should we interpret the money supply in 2018? Thank you.
Zhou Xiaochuan: Deputy Governor Yi Gang has just spoke on this topic. M2 is no longer an accurate measure of the monetary policy stance due to multiple adjustments in its coverage to timely reflect the changes of financial market structure and financial products. As you have asked about M2, assuming M2 coverage being largely the same, how should we interpret it? When growth rate of M2 is roughly the same with that of nominal GDP (equal to actual GDP plus GDP deflator, which is the GDP after price adjustment), then the broad money supply is neither loose nor tight. If the M2 grows at a higher rate than that of the nominal GDP, the monetary policy might be on the easy side; and it is on the tight side when M2 grows slower than nominal GDP. It is true in theory based on the assumption that the structures of financial market and financial products do not change dramatically.
Zhou Xiaochuan: It is fair to say that inflation and employment rate are more important to monitor. More often than not, looking at GDP alone is not enough, we should also take price level and employment rate into account to measure monetary policy. Moreover, the public may need to focus more on the price level, rather than the quantitative changes of broad money, looking at the price level in the market, by taking in considerations price level and inflation to interpret monetary policy stance.
Zhou Xiaochuan: The M2 growth is more than 8 percent in China, which is close to the growth rate of nominal GDP but a little bit lower, which has something to do with the stock of money supply. M2 had been growing faster than nominal GDP in the past, that's why people are saying a lot of water is already in the pool, we don't need to inject much more. So, it is related to the pile-up of money supply. In short, it is difficult to use a simple indicator to tell a complex story, it is not easy. We should take many factors into account to make a judgement. Thank you.
South China Morning Post: Last year the Mainland launched a "Bond Connect" program with Hong Kong, but it only allowed HK investors to invest in the Mainland’s bond market, namely the “north-bound.” Is there going to be “south-bound” program for mainlanders to invest in Hong Kong this year? If so, when will that happen and which factors will be considered? I have another personal question for Mr. Zhou. In your long career serving as the Governor of PBC, what are your most unforgettable moments and regrets?
Zhou Xiaochuan: The opening of financial market is two-way in most cases. The "Bond Connect" program you mentioned started with one-way investment. It’s because Hong Kong, as the international financial center in Asia, has both strong products and not so strong ones. For instance, Hong Kong has strength in stock market and foreign exchange market, but its bond market does not offer lots of tradable products and investment opportunities. Chinese Mainland, however, has a large bond market where many companies conduct financing and trade here, hence there is a strong one-sided demand for investment. It is certainly not difficult to launch “south-bound” connect. In my view, it can be realized at any time so long as there is demand. In general, the two-way opening of financial markets will make constant progress.
Regarding your second question, as I have worked in the in the financial sector for many years, a lot of things happened. It’s hard to pick what is important and what is not. But I want to cite the topic of today's press conference, the reform and opening-up of China's financial sector. It has been an honor and a privilege to work together with all participants to push forward this great cause. Thank you.
YICAI.COM: At present the PBC is taking a lead in making regulatory rules on asset management. What are the considerations of PBC and the progress so far? When will the rules be officially adopted? And will it impact the financial market after its release? Thank you.
Zhou Xiaochuan: The development of asset management is on the right track, but misconduct still remains. Rules on similar products are inconsistent; in some asset management business, money is raised for a stated purpose but used on a different one. There are indeed loopholes. It is therefore necessary to strengthen regulation over the asset management industry. In PBC, Deputy Governor Fan Yifei oversees asset management, but he's not here today. Deputy Governor Pan Gongsheng is in charge of the financial markets and also familiar with what is going on in drafting asset management rules. I'd like to give the floor to him.
Pan Gongsheng: With regard to guidelines on regulating asset management business, we sought opinions from the public last November. The draft guidelines have been made available online, so you can gain a clear understanding of its framework, which. We've collected many comments and views, conducted thorough studies on these views with relevant authorities, and have incorporated the reasonable ones. When formulating the guidelines, we consider how to resolve existing problems and potential risks in the asset management business, and the policy’s potential impact on the financial market. We aim at striking a good balance. The PBC and relevant authorities are amending the guidelines. It will be released as soon as we fulfill the adequate procedures. Thank you.
STCN: My question is about digital currency. We’ve learned that the PBC is doing research on issuing digital currency. What's the progress so far? Is there a timetable or roadmap for the official launch of digital currency? Governor Zhou, how do you see the prospect of digital currency application? Thank you.
Zhou Xiaochuan: You might have noticed that the PBC organized seminars on digital currency three years ago, and then established a Digital Currency Research Institute of PBC. Most recently, we are working with the industry on distributed ledger R&D in an effort to develop digital currency with the market. Different people have different concepts of digital currency. The name of the PBC’s research is "DC/EP," which stands for digital currency and electronic payment. In electronic payment, what get transmitted by mobile communication or other networks are essentially digital, not paper money. Therefore, electronic payment also has the feature of digital currency.
Why do we connect DC with EP? First we need a clear purpose. Digital currency research does not aim to realize application of currency through technical solution, but should promote convenience, efficiency, cost effectiveness, safety, and privacy protection in the retail payment system. These features can be achieved through digital currency based upon technologies such as block chain, distributed ledgers, and DLT, or can be a technology evolving from the existing electronic payment. Internationally, there have been preliminary classifications on the technical routes of digital currency, signaling that it could be a system with multiple possibilities. It is safe to say that the digital currency is inevitable due to technology development. In the future, the use of traditional banknotes and coins will shrink or even disappear one day. There is such a possibility.
In this process, we need to pay attention to financial stability and risk management. Digital currency, as a kind of currency, should support the transmission of monetary and financial stability policies, and offer adequate consumer protection. Some technical solutions might be risky to the point that consumers have to bear the loss when problems occur. As a large economy, we must take precaution to avoid substantive and irreparable loss to the consumers. Therefore, sufficient testing and regional testing of any technology is required before its reliability is established as a precondition for nationwide promotion. In 2017, the PBC initiated the research program on DC/EP and received approval from the State Council. The program is under way.
You may have noticed heated discussions in the market over digital currency; the risks involved in and price fluctuations of digital currency. The main issue is that some technological applications don't focus on applying digital currency in retail payment but has sidetracked to virtual asset transactions which in our views must be dealt with even more prudently by regulatory authorities. From the perspective of the government policy, virtual asset transactions conflict with the principle of financial products and services serving the real economy. Therefore, we do not rush in our program, and are doing research and testing in a steady and orderly fashion. We must hold fast to our principles and emphasize that finance should serve the real economy. While improving efficiency and lowering costs, we should take measures to prevent it from becoming an overly speculative product. I spoke about the research plan just now. The research will enter the testing stage when ready. That is all I can tell at this moment. Thank you.
Nikkei Business Daily: Beginning from the second half of 2016, the Chinese government strengthened capital outflow controll, which has somewhat slowed the progress of RMB internationalization. How do you view the prospect of liberalizing China’s capital account? Thank you.
Zhou Xiaochuan: I personally don’t think there are substantive changes in the convertibility of China’s capital account in general. Capital account convertibility is not the ultimate goal of reform. Capital account convertibility should facilitate China’s integration with and openness to the world economy, and the goal of realizing an open socialist market economy. The currency of an open economy ought to be freely useable and convertible. However, risk prevention should also be considered. Apart from financial risks, we also need to consider risks faced by different entities in the economy, as well as anti-money laundering and combating terrorist financing. Because the international monetary system is imperfect, capital flow will sometimes have side effects that harm some countries, especially developing countries. All these factors will be considered. Therefore, opening-up process will never be straight forward. While it is heading towards such a direction, moderate adjustments will become necessary when problems occur in the economy, and the program and measures will be fine-tuned, in order to make progress.
China proposed the convertibility of RMB for the first time in 1993, in the Third Session of the 14th CPC Central Committee. In this process, China, a big country, launched reform in different fields, and experienced two big twists and turns: the Asian financial turmoil, and the global financial crisis in 2008. Both happened a while ago. Once a problem emerges, people would evaluate and reflect on the policies, and make reasonable adjustments, so as to progress in a more solid and steady way, and finally reach the goal of reform and opening up.
Yi Gang: Let me add something here. Capital account convertibility is progressing steadily. Direct investment is one of the most important items under capital account. It includes foreign direct investment (FDI) and overseas direct investment (ODI). In my view, direct investment under a real trading background is already very convenient. Another major item, i.e. portfolio investment, entails financial market openness, which includes opening up China’s stock market and bond market, allowing Chinese residents to allocate portfolio investment within a wider scope. Capital account convertibility will be steadily promoted in both direct investment and portfolio investment. The measures include reforms to streamline administration, delegate powers, and to facilitate trade and investment, better data transparency, as well as requirements on anti-money laundering and combating terrorist financing. Meanwhile, as the domestic market expands, two-way openness will be promoted in the stock market, bond market, and other markets. When we further open up, it is vital to control risks by adapting regulation to such openness. This will enable us to prevent risks in opening up and to offer Chinese residents and global investors more convenience in the Chinese market and higher efficiency in resource allocation. Thank you.
Xinhua News Agency: In the last two years, virtual currency platforms, such as Bitcoin ICO financing, have been a hot topic, regarding which the PBC and competent authorities took strong regulatory measures with preliminary effects. Could you please elaborate on the considerations in the adoption of these measures and the regulatory measures to be taken as the next step? Thank you.
Zhou Xiaochuan: The measures that you just mentioned may be familiar to the public, and you are asking for the underlying considerations. First, we have answered a question relating to yours, saying that the PBC has followed new trends in Fintech since the early stage. We organized seminars, established a research institute, and studied different work plans. These moves have demonstrated our general attitude towards technology. We have also followed closely the application of block chain and distributed ledger technology. However, we believe that such R&D should proceed in a prudent manner. Given the rapid emergence of the Bitcoin and other branch products, if they expand rapidly or spread to other areas, they may have a significant negative influence on consumers. Besides, they might have unpredictable effects on financial stability and monetary policy transmission. Therefore, although it is good to study new things, we hold that the overall situation, in addition to market forces, should be considered, to rule out conduct of taking advantage of existing policies as that might trigger a shattering event.
Zhou Xiaochuan: Moreover, before finally putting a product into operation, one must consider its relationship with consumers and investors. Before insufficient testing or when the testing result is not widely recognized, rapid expansion may cause problems. Hence, from the perspective of the PBC, first of all, we call for a halt to imprudent products, and require testing to verify the reliability of some promising products before they are introduced to the public. As a result, people may have noticed that the PBC suspended ICO at the end of last August, and after that, we expressed objection to direct trading between the Bitcoin and RMB. Moreover, this also explains why virtual currencies like Bitcoin are not recognized as payment instruments for consumers on a par with notes, coins, and credit cards, and are not accepted by the banking system.
Zhou Xiaochuan: Regulation in the future will, first of all, be highly dynamic, depending on both technical maturity and final results of testing and evaluation. Therefore, the situation remains to be observed and no concrete measure is immediately required. As I just said, people should be clear about their service orientation when thinking of these new technologies. We don’t favor creating speculative products that give people illusion of becoming rich overnight. That is certainly not good. The emphasis should be on serving the real economy. To create a digital currency, efficiency and lower cost must be offered to consumers and the retail market, as well as security and privacy protection. In addition, the big picture should also be considered, which means that the product should not directly conflict with existing financial stability and financial orders. Admittedly, if technological development is to bring changes to the original financial order, prudent studies and evaluation should be made before roll-out. So, in general, technological development is a dynamic process, in which we are all exploring and it is not a must to adopt a certain regulatory policy in the future. When studying these questions, the PBC cooperates closely with market participants and takes opinions from the general public, especially the media. Thank you.
CNS and Chinanews.com: My question is for Governor Zhou. What is the progress so far in the formulation of the regulatory policy on financial holding companies, and on what areas will the regulatory policies be focused? How will these rules be different from those regulatory policies on securities and banking sector? Thank you.
Zhou Xiaochuan: Deputy Governor Pan is also an expert on financial holding companies, so I’ll be brief. First, there are companies that are engaged in financial holding. Some have “financial holding” in their names while others don’t. In essence, it is financial holding within a conglomerate, holding the controlling share of multiple financial institutions, maybe even in different sectors of securities, insurance, banking and trust. Such behavior causes risks to accumulate and should be covered in the regulation of financial holding companies. We are in the early phase of formulating certain basic rules for such regulation. First, we know that the financial sector, which involves high risk, needs a large amount of capital to back it up, because capital provides the basis for risk absorption and mitigation. As a result of the current financial holding behavior, the capital of financial institutions owned by financial holding companies is often a far cry from being adequate or authentic as there are problems of false capital injection and recycled capital injection. So emphasis on the authenticity, quality and adequacy of capital will be a component in strengthening regulation over financial holding companies.
Zhou Xiaochuan: Second, any financial holding should ensure that equity structure of the company and the group, and structure of beneficiary owners are sufficiently transparent; otherwise there might be risks and violations of regulations. That’s why observers have keen interest in financial holding companies’ equity structure and the structure of beneficiary owners, and can often identify problems by looking at the two structures. Only with a clear-cut ownership structure can financial institutions in the holding company strengthen management over connected transactions. Financial institutions in the holding company may have connected transactions with each other or with non-financial companies in the same company (which means with companies in the real economy and with overseas companies). Regulation of connected transactions will therefore be tightened. We must make sure financial holding companies are transparent and operate soundly. I believe this is the starting point to formulate rules and regulate financial holding companies. Of course, we will learn from other countries and make policies that are suitable to China’s conditions.
Pan Gongsheng: Governor Zhou has already given a very comprehensive answer. Financial holding companies have been developing very fast in recent years, lots of risks have emerged as well, including, as Governor Zhou said, cross-sector, cross-border and cross-company financial risks. Within the framework of financial holding company, risks are often times hidden. For example, a holding company might interfere with its financial institutions’ business and operations. China’s sector-specific regulation has left a gap open in the regulation over financial holding companies. Nobody is sure who should be the regulator. That’s why the PBC are required by the CPC Central Committee and State Council to take the lead in developing regulatory rules for financial holding companies.
As for the focus of these regulatory policies, as Governor Zhou just mentioned, we need to supervise the conduct of financial institutions, looking at the essence rather than the surface or in what name the conduct is done. For example, we should strengthen capital supervision over the holding company and establish a consolidated regulatory mechanism to prevent bogus capital injection and recycling capital injection. We will tighten regulation over equity structure to ensure clear-cut equity and organizational structure and transparence in shareholders and beneficiary owners. Regulation of connected transactions will be enhanced, including building a firewall between financial institutions and their holding companies, and between the financial sector companies and non-financial companies. The PBC and other relevant authorities are formulating rules for financial holding company regulation. Thank you.
China National Radio: The recent years have witnessed the viral spread of financial innovations like P2P and bit-coins from scratch. My question is what systems or regulations will be built to ensure an early and effective intervention in possible risks created by those infant financial innovations. Thank you.
Zhou Xiaochuan: You touched on a new topic that has emerged in recent years. Financial sector has always worked very well with innovation in science and technology, and the financial system has always been a staunch advocator and applicator of such innovations all along. Since the early days of computer industry, the reconstruction of early telecommunication systems, the emergence of remote communications and computer networks, the entire financial industry, not only banks but also the stock exchanges, have always been the biggest buyer and user of computers and the internet. The financial industry was among the first users of cloud storage. Mass storage of customer data started in the banking system. Besides, stock and other financial exchanges are among the most loyal followers of cloud computing in terms of network communication, high-speed computing, and data mining.
Nowadays, it appears that some technologies are developing faster than usual. Additionally, scientific applications have led them to create new financial products and new financial market sectors, which were not often seen in the past. When new technology comes out, they put it into use. They basically grasp the direction and range of application. When new technology comes out, we first need to a watch closely and work together. If newer technologies are put into use immediately and become new financial products or tradable on the financial markets, then I think we must be cautious. According to current rules, one must go through the necessary procedures of application and evaluation, and wait for readiness before usage. At the same time, we must emphasize the protection of consumers and investors, as these new products will have a wide impact on the public.
Meanwhile, we will also strengthen the education of investors and consumers, who should thoroughly understand new products before making a decision on whether to use, especially those that were rarely known to the public. After learning, one could decide to use the new tool, but shall bear the risk for his or her own good. Regulation alone may not be enough to control the situation. On the one hand, regulators must keep up with the new trend; on the other, rules must be bolstered. Finally, we must strengthen the education of consumers and investors so as to take on the responsibility themselves.
Phoenix TV: A question on credit management. We have noticed that since the regulators strengthened management of off-balance sheet financing at the end of last year, there has been a sharp increase in on-balance sheet credit. Will the PBC tolerate massive credit increase, or will it take restrictive measures this year? If financing needs cannot be satisfied due to limited credit, will the increase of real interest rate force the PBC to raise interest rates? Thank you.
Zhou Xiaochuan: From the perspective of the PBC, we focus more on figures at an aggregate and macro level. Admittedly, each authority may focus on different indicators. Just as you mentioned, if some off-balance business is moving back to the balance sheet, balance-sheet business may grow relatively faster. For instance, while a certain division or department may consider this much too fast, the PBC, from a macro perspective, look at how aggregate indicators influence economic growth, growth quality, employment, and prices. Therefore, if certain off-balance sheet businesses that violated or skirted the rules are moving back in the balance sheet after stricter implementation of regulatory or accounting standards, then the adjustments should be normal and positive, and will not cause significant issues at the aggregate level.
The price of money, or interest rate that you mentioned, is still decided by the total volume of monetary supply, rather than any single factor. The supply of credit alone will not determine interest rate, as the latter now represents the comprehensive price of a wider range of products. Though there is a price for each of the different categories, such as price for loans, bonds, or equity, the overall price level reflects the state of the macro economy. Thank you.
主持人: 由于时间关系，最后一个问题。
Moderator: We will now come to the final question due to limited time.
Hong Kong Commercial Daily’s new media: Recently, the Hong Kong dollar has steadily weakened and reached its lowest point since the linked exchange rate was put in place. As a result, we hear some expressing the view that Hong Kong needs to review the linked exchange rate system. In 1997, the central government strongly supported Hong Kong’s efforts to maintain currency board arrangement. I would like to know how the PBC views the status and role of Hong Kong dollar, as well as the linked exchange rate system. Thank you.
Zhou Xiaochuan: As a special administrative region, Hong Kong is highly autonomous on monetary, financial and fiscal matters, which has already been clear in the process of its return to the motherland and in the legislation of Basic Law. I think that as a Hong Kong-based media, you know that more than I do. Now, Hong Kong has a currency board system and the Hong Kong dollar is linked to US dollar. After some minor adjustments, the Hong Kong dollar is allowed to fluctuate in two directions by no more than 5 Hong Kong cents. These decisions are taken by the Hong Kong SAR following its own procedure. We fully respect these policy choices, and will spare no effort in supporting Hong Kong’s choices of exchange rate policy and institutional arrangements.
As Hong Kong’s economy has the closest ties with the Chinese mainland, its currency is linked to US dollar, this may cause some changes. It is worth noting that these changes are not unexpected. In fact, there are advantages and disadvantages in every choice, both of which you have to accept and options are usually limited. Instead of making comments or policy suggestions on Hong Kong’s financial and monetary policies, we highly respect Hong Kong’s choices and cooperate with the authorities there. Under the current system, we can take certain measures so that the system functions smoothly and potential disadvantages and drawbacks can be minimized. Thank you!
Moderator: Due to time constraint, we shall bring the press conference to a close. Please allow me to thank Messrs. Zhou Xiaochuan, Yi Gang, Pan Gongsheng, as well as all the correspondents.
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