The Decision on Major Issues Concerning Comprehensively Deepening the Reforms (hereafter, the Decision), deliberated and adopted at the Third Plenum of the 18th CPC Central Committee, makes significant arrangements for the next phase of China’s market-oriented financial reform.
What is new about the reform? How will the reform be advanced? A reporter from Xinhua News Agency recently interviewed Yi Gang, deputy governor of the People’s Bank of China (PBC) and administrator of the State Administration of Foreign Exchange (SAFE).
Accelerating liberalization of interest rates and deregulating deposit interest rates when conditions are met.
Xinhua Reporter: How do you understand the change in the expression from “steadily push ahead with” to “accelerate” with respect to interest-rate liberalization in the Decision? How will we accelerate?
Yi Gang: Interest-rate liberalization is a key to China’s market-oriented reform. As highlighted by the Decision, China will allow the market to play a decisive role in allocating resources, which will require the introduction of interest-rate liberalization, thus leading to the new expression in the Decision.
Interest rates include deposit interest rates, loan interest rates, as well as interest rates for bonds and financial products. The interest rates for bonds and financial products have been liberalized for many years and loan interest rates have also been fully liberalized. Only the deposit interest rate is yet to be liberalized, but we will push ahead with marketization of the deposit interest rate when conditions are met.
“Conditions are met” means replacing the current deposit interest rate adopted by the central bank possibly by the Shanghai interbank offered rate (the Shibor) or the 7-day repo rate. When commercial banks are fully accustomed to fixing prices by adding or deducting basis points based on the Shibor or when commercial banks verify internal capital based on the market benchmark, it will be time to liberalize deposit interest rates.
Since deposit interest rates affect everyone, we will be very prudent in terms of their liberalization. Instead of being low, China’s deposit interest rates are actually well in excess of those in many external currencies, such as the HKD, USD, EUR, YEN, and GBP.
The liberalization of deposit interest rates will be instrumental for allowing markets to play a better role in resource allocations, thus benefiting the public, financial institutions, and SMEs, and it will be favorable for the development of financial products.
Accelerating capital account convertibility to improve the global competitiveness of the Chinese economy
Xinhua: Regarding capital account convertibility, what does the substitution of the new expression “accelerate” to replace “gradually achieve” in the Decision indicate? Is there a timetable for this?
YG: China achieved current account convertibility for the Renminbi in 1996, contributing to the rapid development of its foreign trade. Since China’s external investments and foreign investments in China do not match China’s economic conditions, it is necessary to achieve capital account convertibility. If the capital account is convertible, China will become a power with external investments and also a place that will be most attractive to global capital. With such an internally and externally liberalized capital market, China will see substantial improvements both in productivity and competitiveness.
But there are worries that capital account convertibility will mean full liberalization and the free flow of hot money into and out of China. These worries are unnecessary. As stated in the Decision, efforts will be made to improve the external debt and capital flow management system under a macro-prudential framework, suggesting that we should monitor capital to make it easy to convert and that we should deepen the monitoring of the balance of payments statistics and the cross-border capital flows. When the capital account is convertible, mechanisms for anti-money laundering, anti-terrorism financing, and anti-tax havens will be maintained. This will be a step-by-step and orderly process rather than allowing free flows of hot money without management.
Xinhua: As highlighted in the Decision, efforts should be made to push ahead with a two-way opening of the capital market. Can we interpret a two-way opening to mean Chinese residents will buy foreign stocks and foreign investors will buy A-shares?
YG: A two-way opening of the capital market with respect to liberalization of the capital market as well as the bond market and other derivatives markets has multiple indications and will be advanced step by step. It means that Chinese investors can use two kinds of resources and two markets to optimize resource allocations on a broader scale. With more options, higher efficiency, and a broader horizon, China’s economic agents will have wider freedoms.
Steadily accelerating capital account liberalization will be conducive to outbound investments by Chinese firms, including direct investments, co-financing, greenfield investments, equity investments, and M&A investments. We need to address the multiple needs of firms. However, worries about more outflows than inflows are unnecessary. Since China is the largest emerging market, managers of global assets can be expected to deploy their assets to China and to show great confidence in China. If the market is opened up further, offering more conveniences to global investors to access the Chinese market with respect to assets allocations and investments, China will become more attractive to the world.
Allowing private capital to set up banks and quickly building a deposit insurance system
Xinhua: As stated in the Decision, qualified private capital will be allowed to set up financial institutions, such as small- and medium-sized banks. I am wondering what measures will be taken in this regard?
YG: This is a very important decision. Allowing qualified private capital to initiate banks is undoubtedly a further step in opening up the domestic market. This move will make sure that public capital, the non-public economy, and private capital will move into the banking sector on an equal basis to deliver easy and efficient financial services to the society, ultimately benefiting micro and small businesses as well as the general public.
Xinhua: The Decision highlights that a deposit insurance system will be established. What will this consideration be based on? Does this indicate that people’s bank deposits will be safe?
YG: Responsible departments are actively preparing schemes related to the deposit insurance system and will launch the system in the near future.
There are three priorities in the deposit insurance system. First, this system is designed to protect depositors’ interests and rights for the benefit of the absolute majority of depositors. Second, unlike what has been done in the past—i.e., protecting the deposits of the public more actively than protecting the deposits of firms—this system will benefit SMEs. Third, the systemic mechanism will be positive and encouraging, thus preventing moral risks in economic terms. With such a mechanism in place, banks will become more prudential and will comply more fully with the laws and regulations, thus decreasing the premiums and risks and enhancing their reputation. Banks with better reputations will have better images. This system is a very important part of the infrastructure in China’s financial market and a cornerstone to China’s financial stability.
Globally, the deposit insurance system is very mature. The system has played a significant role, especially during the financial crisis and the European debt crisis. It increases financial stability and allows society’s expectations for the financial sector to be more transparent. With such a system in place, our bank deposits will be more secure.
As deposit insurance premiums are paid by financial institutions, the public will perceive no difference. The premium rate, measured by the risk exposure, will be low compared with global levels. There will be no charge for the premium as they reach a certain level.
Improving the market-based exchange-rate formation mechanism for the Renminbi to enhance the resilience of the exchange rate
Xinhua: The Decision states that efforts should be made to improve the market-based exchange-rate formation mechanism. I am wondering how we can make further improvements? What are your ideas about an RMB appreciation?
YG: First, accelerate market construction. As it is not very convenient in terms of some products and transactions, more products need to be offered to provide firms with tools for hedging and risk prevention. Second, enhance the resilience of RMB exchange rates by establishing a fully resilient, two-way floating and market-based exchange-rate formation mechanism. Third, in improving the mechanism, efforts must be made to make sure RMB exchange rates remain stable at a rational and balanced level.
Xinhua: Since the exchange-rate reform was first inaugurated, the RMB exchange rate has risen by more than 34 percent. Is this a balanced level? What is your idea of a balanced level?
YG: Currently RMB exchange rates are very close to a balanced level. To understand the RMB exchange rates, one must analyze the pressures and benefits from a RMB appreciation. Despite the fact that a RMB appreciation imposes pressures on export businesses, it greatly benefits the public: first, it has enhanced overall national strength; second, the prices of imported goods that are closely related to people’s livelihood, such as beans and crude oil, have been reduced; third, shopping, studying, and traveling abroad have become cheaper.
Since the kick-off of the exchange-rate reform in 2005, the nominal exchange rate of the RMB against a package of other currencies has risen 17 percent; in other words, the RMB has appreciated less than 2 percent per year. This pace indicates that China’s labor productivity and economic efficiency have improved, and China’s economic competitiveness has gradually been enhanced since the reform and opening up.
(Originally released at http://www.xinhuanet.com on November 26, 2013.)
