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)