On the afternoon of March 12th, a press conference of the Third Session of the Twelfth National People's Congress (NPC) was held at the Media Center. Zhou Xiaochuan, Governor of the People’s Bank of China (PBC), Yi Gang, Vice Governor of PBC and Administrator of the State Administration of Foreign Exchange (SAFE), Pan Gongsheng, Vice Governor of the PBC, and Jin Qi, Chairperson of the Board of Silk Road Fund Co., Ltd. answered questions from Chinese and foreign journalists concerning the financial reform and development. The following is a transcript of the conference:  

[Wang Xiaoyun, Deputy Director of the Press Center of the Third Session of the Twelfth National People's Congress, and moderator of the conference] (March 12,2015 14:50:35)

Good afternoon, dear friends from the press. Welcome to this press conference on Financial Reform and Development. We are honored to have four distinguished guests with us to answer your questions. Please allow me to introduce Mr. Zhou Xiaochuan first, who, since taking office as PBC Governor, has been repeatedly invited to the podium of the NPC press conferences—for nine consecutive years, according to a little research I did. Mr. Zhou is therefore an old friend, and a good friend, of the media, as well as an experienced speaker on this podium. Here I would like to extend special thanks to Mr. Zhou and his leadership team. Now I give the floor to Mr. Zhou.

[Zhou Xiaochuan] (March 12,2015 14:51:16)

Good afternoon, everyone! Let me first thank you for your interest in the financial reform and development, and for your attention and coverage over the years. Today, I am joined by Vice Governor Yi Gang, Vice Governor Pan Gongsheng, and Ms. Jin Qi, Chairperson of the Silk Road Fund, as we notice that some of you are interested in this newly established fund. Thank you very much.

[Italian Press](March 12,2015 14:52:11)

Thank you. I am a reporter from the Italian Press. My question is for Governor Zhou. I wonder when China will introduce the Deposit Insurance System, and when it will become effective. Thank you.

[Zhou Xiaochuan] (March 12,2015 14:53:01)

As we all know, the Deposit Insurance System is an important part of the financial reform. After a long period of intensive preparation, a draft of the Deposit Insurance Regulations was released at the end of last year for public comments. If the comments we collect reflect a positive outcome in general, we will conclude that the mechanism and conditions are basically mature for establishing the Deposit Insurance System. I believe the system will be launched in the first half of this year.

[China Daily](March 12, 2015 14:54:26)

Thank you. I am a reporter from the China Daily. China’s economy is faced with heavy downward pressure, and it is widely believed that China should loosen up its monetary policy. What is the Central Bank’s view on this? On the other hand, we notice that the Central Bank has been flexibly using monetary policy tools for its operations, which have produced an easing outcome. Given all these efforts, why does the Central Bank continue to say that its monetary policy remains prudent as before? Thank you.

[Zhou Xiaochuan] (March 12, 2015 14:55:16)

Let me answer your questions in this way. Firstly, compared with the past few years, China’s economic growth is slowing down, but this also coincides with a new phase of China’s economic development, which is called “New Normal”, a term frequently used by Chinese leaders.

[Zhou Xiaochuan] (March 12, 2015 14:56:41)

“New Normal” is a normal state, neither special nor problematic; there is then no need to come up with a new term for our monetary policy. Besides, you request a clarification of the trends of China's current monetary policy. Generally speaking, there are five broad categories of the monetary policy: easy, moderately easy, prudent, moderately tight and tight.

[Zhou Xiaochuan] (March 12, 2015 14:58:38)

In both text and meaning, these five categories cover a wide spectrum. Within each category, there is much room for flexible adjustments, but shifting from one category to another needs to take a huge step. Recently, the Central Bank has employed a number of monetary policy tools seldom used before, but the effect of each tool is not necessarily significant, especially when considering the colossal size of our national economy.

[Zhou Xiaochuan] (March 12, 2015 14:59:42)

One important indicator of our monetary policy is M2, the growth rate of which was specifically mentioned in the Report on the Work of Government. We have undoubtedly used various tools recently, including some targeted easing adjustments, but even when their effects are put together, the growth of broad M2 money supply is still moderate, and therefore our prudent monetary policy remains unchanged.

[Xinhua News Agency, Xinhuanet.com](March 12, 2015 15:00:31)

Thank you. I am a reporter from Xinhua News Agency and Xinhuanet.com. I have a question for Governor Zhou. The PPI has undergone negative growth for 36 consecutive months. Does that mean China’s economy is facing deflationary risks? After cutting interest rates twice and reducing the deposit reserve ratio once, why is the Central Bank still emphasizing a neutral stance in its monetary policy? How should the term “neutral” be interpreted? Thank you.

[Zhou Xiaochuan] (March 12, 2015 15:01:30)

Price is indeed a significant indicator of economic development. There are several indicators relating to price: CPI (Consumer Price Index), PPI (Producer Price Index), GDP Deflator, etc. PPI is closely related to investment activities, so it tends to fluctuate violently when our economic structure is shifting into the “New Normal”.

[Zhou Xiaochuan] (March 12, 2015 15:03:51)

Moreover, it should be noted that commodity prices in the international market have been fluctuating sharply these days. Therefore, when observing price changes, we should pay enough attention, allow a longer time frame and consider a broader picture, instead of jumping to conclusions. Under such circumstances, after several adjustments for the monetary policy tools, we have generally maintained moderate liquidity in the financial market, which is within the prudent and neutral category that you mentioned. Yi Gang, Vice Governor, is in charge of monetary policies. Maybe he can elaborate further?

[Yi Gang] (March 12, 2015 15:04:43)

Although there are many indicators to measure inflation, CPI is the most primary one. China’s CPI saw negative growth in some years, for example, in 1998 and 1999, as well as in 2002 and 2009, when the growth remained slightly negative.

[Yi Gang] (March 12, 2015 15:06:20)

We know that CPI went up by 2% last year, and this February’s CPI registered a 1.4% growth year on year. We are closely watching the trends of CPI and PPI. As Mr. Zhou mentioned earlier, although PPI has been dropping for 36 consecutive months, the downward pressure is global; it has been hit hard by the recent price shrinks in the oil, commodity and iron ore markets. While paying close attention to prices, we will adopt prudent monetary policies to regulate liquidity. In fact, a positive fiscal policy and a prudent monetary policy constitute the most desirable combination to respond to the current situation, and the policies are allowed to work as they are designed to. Thank you.

[Taiwan Economic Daily] (March 12, 2015 15:07:07)

Thank you. I am a reporter from the Taiwan Economic Daily. We have many questions in mind, but as time is limited, I have picked two that we are most concerned about. Currently, the Taiwan people have an increasing demand to possess and use Renminbi. Is it possible that the exchange quota of 20,000 yuan per day is expanded, or totally cancelled, just as what was done in Hong Kong last year? Besides, is there any progress in the signing of RMB Clearing Agreement between Taiwan and Mainland China, or has there been any obstacle? Thank you.

[Zhou Xiaochuan] (March 12, 2015 15:09:47)

The cross-border (cross-strait) use of RMB has just emerged. At this initial stage, some protection lines are drawn to guard against potential troubles; hence these arrangements that resemble quotas. But as the RMB’s cross-border business expands, we will be more experienced, and there will also be more demand for the RMB. Under such circumstances, these quotas can be reviewed and appropriately loosened—such opportunities definitely exist. Speaking of Taiwan’s RMB clearing business, the Taiwan branch of the Bank of China has in fact been acting as an RMB clearing bank, and it is in full operation. If business expands or new demand occurs, further study will be made. Thank you.

[Financial News] (March 12, 2015 15:10:39)

Thank you. I am a reporter from the Financial News. I have questions for Chairman Jin Qi. Hello, Ms. Jin, we know that setting up the Silk Road Fund is one of the initiatives to propel the “One Belt and One Road (OBOR)” strategy. What role do you think this Fund will play in this strategy? Will the investment only go to those countries along the “One Belt and One Road”? And will there be other concrete initiatives for future development and investments? Thank you.

[Jin Qi] (March 12, 201515:13:36)

Thank you for your question. As we all know, Xi Jinping, General Secretary of the CPC Central Committee, announced on November 8, 2014 that China will dedicate USD 40 billion to set up the Silk Road Fund. Then the People’s Bank of China took the lead and worked with relevant authorities on the preparation. The Fund completed the business registration in accordance with the Company Law of PRC at the end of last year.

[Jin Qi] (March 12, 2015 15:14:54)

Since the beginning of this year, we have made great endeavors to improve corporate governance structure. The Board of Directors, the Board of Supervisors, and senior management team have been created. And while further improving the structure, we will carry out substantial business as quickly as possible.

[Jin Qi] (March 12, 2015 15:17:26)

The Silk Road Fund, a mid- to-long-term development investment fund, aims to realize interconnection between the countries and areas along the “One Belt and One Road”. While we are working towards this goal, we need to follow four principles. The first one is the principle of connection. Our investment, first and foremost, needs to be aligned with those countries’ development strategies and planning. We need to capture our investment opportunities as the program proceeds. The program doesn't have strict geographical restrictions. We believe that as long as there is demand for interconnection, the Silk Road Fund can participate in relevant projects. To be specific, the Fund will adopt various financing methods, with mid- to-long-term equities as the main one, and make investment in infrastructure, energy development, industry cooperation and financial collaboration. In particular, we need to lay special emphasis on China’s “go-global” projects with high-end technology and high-quality capacity to facilitate China and the countries and areas along the “One Belt and One Road” to achieve common development and prosperity.

[Jin Qi] (March 12, 2015 15:19:06)

The second one is the principle of effectiveness. The capital of the Silk Road Fund comes from different shareholders, including Foreign Exchange Reserve, China Investment Corporation, the Export-Import Bank of China and China Development Bank, and all the capital has corresponding RMB liabilities. Therefore, the Fund is not in assistance or donation nature. We must follow the market-based principle and invest money in profitable projects in a way to achieve reasonable returns on investment in the medium and long term and well protect shareholders’ rights and interests.   

[Jin Qi] (March 12, 2015 15:22:09)

The third one is the principle of cooperation. The Silk Road Fund is a mid- to long-term development investment fund established in accordance with the Company Law, instead of a multi-lateral development organization. We must abide by the laws and regulations of China and the countries which the investment goes to, maintain the international market rules and the international financial order, and emphasize environmental friendliness and sustainability. The strength of the Fund lies in the fact that it can provide mid-to-long-term equity investment. We must cooperate and complement domestic and foreign financial institutions, and provide more financing options to those projects that can realize stable and reasonable returns in the medium to long term in a diversified investment and financing manner including equities, financial claims, and loans. As a result, the Fund and other financial institutions are not substitutes for each other; they work with each other and are complementary to each other to achieve win-wins, so as to make our contribution to the development of the countries and areas along the “One Belt and One Road”.

[Jin Qi] (March 12, 2015 15:23:43)

The fourth one is the principle of openness. The Silk Road Fund is open. After running it for a period of time, we warmly welcome investors sharing our aspirations to join us or cooperate with us on sub-funds. And we are also willing to collaborate with international and regional multi-lateral financial institutions, including the soon-to-be-opened Asian Infrastructure Investment Bank (AIIB), China Development Bank, the Export-Import Bank of China, other commercial banks, and the China-Africa Development Fund on financing and investment projects. Each institution can complement each other’s advantages through collaboration, and make contributions to the regional and global development and prosperity.

[Jin Qi] (March 12, 2015 15:24:35)

At last, I would like to avail myself of this opportunity to thank all the communities of society and all friends from the press for your care and support. For your information, there was a report dated February 16 on the interview with Zhou Xiaochuan, governor of the Central Bank, on the Silk Road Fund. This report gives a comprehensive and detailed account of the Silk Road Fund and provides answers to a variety of questions that you are concerned about. Therefore, I won’t take up more time here. If you want to know more details, please refer to that report. Thank you.

[Reporter from Reuters] (March 12,2015 15:24:57)

Thank you. I am a reporter from the Reuters. I am wondering how the Central Bank distinguishesordinary capital outflows and hot money flight.Are you concerned that the appreciation of the US dollars will aggravate China’s capital outflow to a dangerous level? Thank you.    

[Zhou Xiaochuan] (March 12, 2015 15:25:24)

This is a good question, I should say. Firstly, I agree with you that such concepts shall be differentiated. Some people call it fund outflow, some, capital outflow, and others, capital flight. As a matter of fact, these termsdo vary with each other. Since China is a major trade and investment country in the international market, we have both trade in goods and trade in services. All these are normal activities, and we need to make payments for goods and services we purchase, and for foreign investment as well. Therefore money flows out, and these are all normal inflows and outflows of funds.

[Zhou Xiaochuan] (March 12, 2015 15:29:42)

Importers, exporters and investors would think of a good timing. When is suitable to import more, such as when the oil price is cheaper; this is quite normal. When making imports, there are also options of either deferred exchange payment or immediate exchange payment. Foreign exchange could be received when making exports, and when such foreign exchange is received, exporters could also consider when to conduct exchange settlement. As a result, both capital and funds would flow to a certain degree, and we could see from China’s BOP, the inflow and outflow of most funds have normal trade and investment background. However, in some cases, it may be connected with hot money, which not only includes hot money from overseas countries but also from the Chinese people. Hot money is defined as flows of funds which are mainly targeted to pursue short-term speculative gains in the financial market, and could possibly be viewed as short-term investment-oriented hot money. Although the quantity is not easy to be accurately observed, its existence can be affirmed.

[Zhou Xiaochuan] (March 12, 2015 15:30:44)

Based on China’s currentstate, this is not severe yet. In other countries, capital flight is caused by loss of confidence in the national environment and a perception of the lack of guarantee of wealth. China encounters such circumstances as well, but compared with normal investment and trade, the quantity is not very large, and therefore I believe that distinguishingsuch concepts is important.

[Zhou Xiaochuan] (March 12, 2015 15:32:44)

If the Federal Reserve raises interest rate for US dollars, playersin the financial market may consider buying more US dollars, or depositingcertain US dollars overseas, which is reasonable, and I believe this tendency must exist. However, the signal given by the FED means that this action is relatively careful and prudent, and such measures have been taken before, but it still shows its patience. Overall, there would be some opportunities to manipulate financial assets, but it will not produce huge differences and speculative opportunities. Therefore, based on what we have observed, we don’t believe it would be a very serious threat. And in the meantime, if the United States raises interest rate, it would bring the positive side as well, indicating that the US economy has finally entered into a substantial recovery period after so many years since the outbreak of the financial crisis, which is a good sign for the global economy as well. So we should consider all dimensions of such an issue. Thank you and we will invite Mr. Yi Gang to give us more details.

[Yi Gang] (March 12, 2015 15:33:10)

I'd like to make some additions, since I’ve been considering this all the time. Currently, China has almost become the No. 1 or No.2 giant in trade in goods and trade in services, with a huge flow of trade in goods and trade in service. Besides, with respect to FDI and ODI, the inbound and outbound investments are also huge. As we all know, over 100 million person times went abroad last year, andthe people flow, material flow, capital flow and investment flow all created cross-border fund flow.

[Yi Gang] (March 12, 2015 15:33:44)

I’d like to share one figure with you. China’s foreign-related income of domestic enterprises and individuals amounted to over USD3.3 trillion, and our foreign-related expenditure wasmore than USD3.2 trillionlast year. Calculated by 240 working days every year, both the foreign-related income and expenditure handled each day by Chinese banks on behalf of clients (including both enterprises and individuals) exceeded USD10 billion. So this is the current situation. Therefore, China’s economy has become very open and has been fully integrated into the global economy since the reform and openingup policy was adopted.

[Yi Gang] (March 12, 2015 15:34:34)

I’d like to make another point. For example, whether there were outflows recently. We could see that the US dollar deposits of enterprises and individuals in domestic financial institutions increased by over USD100 billion, and the domestic US dollar deposits in this January increasedfurther by over 40 billion. What does this mean? It indicates that under current economic situations, China’s enterprises, individuals and financial institutions have all been optimizing their balance sheets, adjusting the currency structure of their assets and liabilities based on expectations.     

[Yi Gang] (March 12, 2015 15:38:34)

The fast increase in US dollar deposits is a good sign thatmore foreign exchange has been owned by the people. We also observe that in the most recenthalf year, loans increased more slowly than they did before. So this reporter raised a very good question, that is, how weshall distinguish normal inflows and outflowsfrom capital flight? We have also been studying and observing this issue. As a matter of fact, to address the need of risk prevention, currency match and hedging, our economic entities have established a relatively stable mechanism by optimizing their balance sheets. Previously our foreign exchange reserves all went to the Central Bank, but now, enterprises, individuals and financial institutions like to possess more US dollars, which we could say is rational and normal. On the other hand, we are also on alert against some abnormal cross-border fund flows. Thank you.

[Ta Kung Pao and Takungpao.com of Hong Kong] (March 12, 2015 15:39:12)

Thank you. I’m a reporter from Ta Kung Pao and Takungpao.com of Hong Kong. We've noticed that thefluctuations of the RMB foreign exchange rate have been wideningrecently, which impacted the RMB deposits of Hong Kong residents as well as cross-border trade settlement, and are mainly reflected in the decline of account opening for RMB deposits and the shrinking in the issuance of typical bonds. I’d like to ask how the Central Bank will respond to this? Will the Central Bank introduce new measures this year to support Hong Kong in the construction of the RMB offshore market? Thank you.

[Zhou Xiaochuan] (March 12, 2015 15:39:57)

Yi Gang,Vice Governor of PBC, mentionedjust now that China's economy has become increasingly open to the outside. With such open economy, it is normal to witness the fluctuations of exchange rate, since it depends both on domestic economic fundamentals and on the supply and demand relationship of RMB in the global market and the international financial market.   

[Zhou Xiaochuan] (March 12, 2015 15:41:09)

There is another factor. The volatility of exchange rate is related to whether there are crucial events internationally and whether there are causes for fluctuations as well. As a matter of fact, the whole world has been quite eventful since last year, so many factors have contributed to the fluctuations. If we adopt a comparative perspective, we could perceive that compared with many other currencies in the world, RMB is relatively stable in terms of exchange rate fluctuation in a certain period. We can make such comparisons and would find out that the exchange rates of many other currencies are more volatile than that of RMB.     

[Zhou Xiaochuan] (March 12, 2015 15:41:53)

The US dollar has started to rallysince last year, which is anothercrucial factor. As Hong Kong dollar and US dollar are closer to each other, the fluctuations of the RMB exchange rate against US dollar are shown by the certain volatility of the exchange rate between the RMB and Hong Kong dollar. Generally speaking, we believe this fluctuation is normal, and traders, investors and players in the financial market can properly cope with such a fluctuation.

[Zhou Xiaochuan] (March 12, 2015 15:42:33)

We believe we have been communicating well on Hong Kong offshore RMB business. Whenever there is such a need, we would make some adjustments and introduce some new measures to support Hong Kong and perform the functions of an offshore RMB center. Following the launch of Shanghai-Hong Kong Stock Connect last year, we will launch Shenzhen-Hong Kong Stock Connect this year. All these efforts would provide more administrative convenience in terms of mutual communicationin the capital market and support for mutual communication in the capital market, to support Hong Kong to play its role. Thank you.

[Beijing Times] (March 12, 2015 15:42:51)

Thank you. I’m a reporter from Beijing Times. My question is for Mr. Zhou Xiaochuan. The Central Bank has been constantly promoting the interest rate liberalization process, and we’ve also noticed that during the asymmetric interest rate cut prior to the National People’s Congress, the Central Bank expanded the upward floating range for deposit rates. My question is whether it is possible that loan interest rate will be fully liberalized this year,given currentprogress of interest rate liberalization inChina? Thank you.

[Zhou Xiaochuan] (March 12, 2015 15:43:35)

Efforts have been made on interest rate liberalization for many years, and some people, after careful observation, may have discovered the pattern along this path: over the past years, for different products and varieties, we started from products with large-amount and gradually shifted to small-amount, and then expanded loans to deposits. Overall, considerable progress has been made in a step-by-step manner.

[Zhou Xiaochuan] (March 12, 2015 15:44:42)

Last year the upward floating range for the RMB deposit interest rate was expanded further by 20%, and the recent interest rate adjustment has further pushed up the floating range by 10%. Based on this, it is estimated that we are now very close to interest rate liberalization, or to the final removal of the upper limit for deposit interest rate. This year, if we could have a chance, it would be possible that the upper limit of deposit interest rate will be lifted, which means the final step will be taken. We could say this is highly probable. Do you want to share your ideas, Mr. Yi?

[Yi Gang] (March 12, 2015 15:45:25)

Our observation finds that after the upper floating range is raised to 1.3 times the benchmark rate this time around, our commercial banks still can conduct differentiated pricing that allows different camps of banks to have varying floating ranges, and that big banks had slightly lower upward floating ranges, such as around 10%. The medium-sized banks, which were previously called joint-stock commercial banks, witnessed an upward floating range of about 20%. Some small financial institutions, including rural cooperative financial institutions, saw a higher floating range, say, 20%-30%. Such differentiated pricing actually is helping create the optimization between commercial banks and clients.   

[Yi Gang] (March 12, 2015 15:47:04)

According to my observation, it is notable that although the foreign-funded banks in China don’t have a big market share, they generally witness a relatively small upward floating range. 36% of foreign-funded banks basically use the benchmark interest rate, and 40% foreign-funded banks have an upward floating range of slightly more than 10%. If our financial institutions, our families, individuals and enterprises, after some time of adaptation, have all adapted to this environment, I believe China’s benchmark interest rates, such as the overnight and seven-day repurchase rate, are becoming mature, indicating that the conditions for interest rate liberalization are becoming mature too. In my view, the interest rate liberalization will increasingly head towards the direction of marketizationin the future.

[Express Magazine and China Express Mail Service Weekly] （March 12,2015 15:47:26）  

Thank you. I’m a reporter from the Express Magazine and China Express Mail Service Weekly. My question is for Mr. Zhou Xiaochuan. China’s broad monetary supply has been at the forefront across the world, with a very high deposit rate. But why do the SMEs including courier firms still find it hard to raise funds and to do so at a low price? Thank you.

[Zhou Xiaochuan] (March 12, 2015 15:48:21)

Heated discussions on financing difficulties and costly financing have been carried out in the market and the media. As you may discover, this is a comprehensive phenomenon. There are many reasons behind it, and I cannot identify each here. I’d like to share with you several ideas I’ve noticed among the external opinions, which I believe merit attention. Why do the SMEs find it hard to raise funds and to do so at a low price, despite the huge monetary supply and large aggregate loans? One of the reasons is that some companies with low efficiency occupy too many funds, and thus squeeze out SMEs, making it less likely for SMEs to raise funds. This situation should be improved.

[Zhou Xiaochuan] (March 12, 2015 15:48:56)

It is said that the headquarters of most large- and medium-sized enterprises are located in large and medium cities, so clients in large- and medium-sized cities have more choices. That means you could select another bank even if one bank refuses to lend money to you since dozens of banks are located on a street. And if this bank requests higher price, you could go to another. As long as an SME’s performance is acceptable, it normally stands a chance to raise funds. It’s not a big problem.

[Zhou Xiaochuan] (March 12, 2015 15:49:42)

But for SMEs and some start-up micro businesses, since some of them are grassroots firms and grassroots financial services are still not adequate, they may have only one or two banks available in their neighborhood. If the loan officer believes your project not promising and likely to incur some risks, they would not extend loans to you whereas you couldn’t find any other bank. Therefore, the financial services at the grassroots level shall be further expanded to provide competitive financial services, which may help small and micro businesses to solve the difficulties of financing and reduce the cost of financing. Premier Li Keqiang also stressed in the Report on the Work of Government that efforts should be stepped up to support private capital to set up small and medium-sized banks, which is also another solution to this issue.

[Zhou Xiaochuan] (March 12, 2015 15:50:51)

Besides, this is relevant to the interest rate liberalization we mentioned just now. If price has rigidity, then the balance between market supply and demand would encounter certain barriers. As interest rate liberalization precedes further, the relationship between market demand and supply would be better balanced. It is for sure that there is still much work to do in financial policies, regulatory policies as well as macro control policies, which can further help SMEs to get loans. A series of measures have been introduced recently, including the “Ten Measures”introduced last year, as well as another measure for innovative enterprises. All these measures will take effectgradually, not instantly. We couldn't expect the problems to be solved immediately after the policies are introduced, but in a step-by-step manner. This is what I want to say, and just as I mentioned, you can consult considerable articles available on this issue.

[HKSTV] (March 12, 2015 15:51:14)

Thank you. I’m a reporter from Hong Kong Satellite TV. Zhou Xiaochuan, PBC governor, and Leung Chun Ying,the chief executive ofHong Kong, discussed many issues with each other during the National People’s Congress, including Shanghai-Hong Kong Stock Connect. What approach do you believe will be adopted to further promote the connectivity between each other's capital market, including Shenzhen-Hong Kong Stock Connect and mutual recognition of funds domiciled on both sides. Will unstable Hong Kong, if possible, affect existing policies? Thank you.   

[Zhou Xiaochuan] (March 12, 2015 15:53:23)

Hong Kong is universally known as an international financial center. Both the Hong Kong SAR government and the chief executive are interested in the development pattern of the financial center and how it can play a bigger role and become more competitive. That's why they often communicate with and meet us. Shanghai-Hong Kong Stock Connect, launched last year, is a major progress in the financial market. People were generally happy to see the launch of Shanghai-Hong Kong Stock Connect, which runs stably now. However, as it is new to us, designers were not very sure about it when designing, confirming and preparing for its launch last year, and its design is somewhat conservative. But some time after its launch, it is found that this could be better designed, and our mind could be further emancipated. So we exchanged our ideas on this issue. Shanghai-Hong Kong Stock Connect has laid a foundation for the launch of Shenzhen-Hong Kong Stock Connect, and also provides some ideas for the latter on how it could function better and more effectively so as to make the market play a bigger role in resource allocation.

[Zhou Xiaochuan] (March 12, 2015 15:55:13)

Will the financial market develop smoothly? In my opinion, financial markets often go through ups and downs in the course of its development, which are either caused by itself or reflective of the economy and society, or even the geopolitics. Whenever something goes wrong with the industry, the share or bond prices would be reflected in the capital market. This means that the capital market is a tool for risk management, capable of both reflecting and managing risks. To manage risks, we must make full use of the capital market. Given the situations of the participants in the capital market of Hong Kong, which has been an international financial center over the years, we are fully confident in Hong Kong's capital market, and its ability to continue to play an important role in managing risks. Thank you.    

[Legal Daily and legaldaily.com.cn](March 12, 2015 15:55:47)

Thank you. I’m a reporter from Legal Daily and legaldaily.com.cn. Premier Li Keqiang pointed out in this year's Report on theWork of theGovernment, "We must facilitate qualified private capital to duly incorporate financial institutions such as medium- and small-sized banks, and approve of one when it becomes mature, without setting any quota." Without setting any quota gives private banks more room for development. I am wondering what legislations will be developed and what regulatory measures will be improved to ensure the healthy development of pilot banks and guard against financial risks. Thank you.

[Zhou Xiaochuan] (March 12, 2015 15:56:52)

This question has drawn wide concern in society. The People’s Bank of China (PBC) has done a lot for this. China Banking Regulatory Commission (CBRC) is responsible for incorporating commercial banks. Sometimes we convene press conferences together with the PBC, CBRC, CSRC, CIRC and SAFE. Unfortunately, no CBRC leaders are present today, otherwise they would give you a better answer. Anyway, let me answer your question.

[Zhou Xiaochuan] (March 12, 2015 15:58:28)

First, I believe that we should understand the financial services provided by banks are also competitive services with high access threshold that is to ensure security since banks are responsible for managing capital for their clients. As a reporter said just now that SMEs find it difficult to raise funds, we would say this also needs competition. If private capital can meet this threshold, they should be allowed to set upunder the principle of fair competition medium- and small-sized new-type private banks that serve the communities.

[Zhou Xiaochuan] (March 12, 2015 15:59:05)

People used to have slightly different understanding of this issue, believing banking was a sensitive business that involved heavy risks, and didn't recommend common people to engage in this sector. But as time goes by, this concept has gradually changed.

[Zhou Xiaochuan] (March 12, 2015 16:00:02)

Second, the standards and qualifications must be clarified. One important issue is that private banks should be able to identify and mitigate risks. There also should be more stringent regulation on compliance of private banks than that of other industries. Therefore it is a prerequisite to ensure the maturity of regulation and the adequacy of regulatory forces.

[Zhou Xiaochuan] (March 12, 2015 16:01:05)

Third, financial infrastructure shall ensure the normal operations of private banks. Financial infrastructure covers payment, clearing and transaction. If the infrastructure is unsound or weak, it can also lead to sudden problems during operations of these institutions.

[Zhou Xiaochuan] (March 12, 2015 16:02:12)

In addition, you are right that the rules and systems shall be able to better support the operations of small- and medium-sized banks. China's existing laws don’t have particularly unfavorable provisions against private banks, but we should say that some of the regulations and systems shall be refined, with respect to private financial institutions, corporate governance and other weak points. More refined regulations and systems,including laws and regulations, shall be developed to better promote the sound development of private financial institutions. Thank you.

[Hong Kong Cable TV] （March 12, 2015 16:02:38）  

Thank you. I’m a reporter from Hong Kong Cable TV. My question is about the RMB internationalization since the International Monetary Fund (IMF) will review Special Drawing Rights (SDRs) this year. What's the likelihood do you believe the RMB will be included in SDR? As the internationalization proceeds, some analyses state that the progress of internationalization will marginalize Hong Kong dollars. You said just now that the Hong Kong dollars are pegged to US dollars. Do you think it is necessary to adjust this relationship and this model to cooperate with the review? Thank you.

[Yi Gang] (March 12, 2015 16:04:22)

Let me answer this question. The IMF will review the currencies in the SDR basket this year, which is conducted every five years. As we all know, the RMB internationalization has proceeded rapidly over the past 5 years. Currently, the RMB is the world's No. 2 trade financing currency and No. 6 trading currency, and used by many national and regional monetary authorities as a reserve currency.

[Yi Gang] (March 12, 2015 16:04:42)

The IMF follows two standards in reviewing the currencies in the SDR basket: firstly, the sizes of trade in goods and trade in services behind the currency. It is no doubt that China will pass the review in this aspect, since its sizes of trade in goods and trade in services are at the forefront in the world. Second, free use of the currency. There are some different views on this standard now. But generally speaking, the development of the CNY and CNH markets, as mentioned by the reporter just now, as well as overseas RMB deposits, bonds and development of other derivatives show that RMB is developing towards a currency that can be used freely.

[Yi Gang] (March 12, 2015 16:05:02)

Undoubtedly, the inclusion of the RMB in the SDR basket is conducive to enhancing the representativeness of SDR, and can help promote the reform of the international monetary system. In my opinion, this would also facilitate the reform and opening-up of China’s financial sector. Therefore, we are also evaluating the possibility, and have been actively communicating with our counterparts in the IMF, in the hope that they could fully consider the progress of the RMB internationalization, and make RMB a currency in the SDR basket in the foreseeable future.

[Yi Gang] (March 12, 2015 16:05:28)

Of course, we should be objective concerning the inclusion of the RMB in the SDR basket, which should be a natural result. No matter when or whether the RMB will be included, China’s financial reform and opening-up will continue.

[Yi Gang] (March 12, 2015 16:06:17)

With respect to your second question, I would say that by following the basic law of "One Country, Two Systems", the two monetary authorities have been communicating with each other very effectively and the financial cooperation between the Hong Kong dollars and the RMB have been smooth. I don’t see any need to adjust this landscape. In my opinion, the system ofpegging the Hong Kong dollars to the US dollars has been running successfully, and therefore, our cooperation with Hong Kong Monetary Authority, including cooperation in the financial market, as well as in the construction of the CNH market as we’ve discussed today, will be further deepened. Thank you.   

[Jiangsu Newscasting] (March 12, 2015 16:07:05)

Thank you. I’m a reporter from Jiangsu Newscasting. I have a question for Mr. Zhou. The P2P online lending has been developing rapidly, but also hasled to many risky events, while regulatory measures have not been introduced yet. Although this is not merely the job of the central bank, I'm wondering when the regulatory measures or opinions on Internet finance would be introduced. Is there a timetable? Could you share with us some details on that? Thank you.

[Zhou Xiaochuan] (March 12, 2015 16:08:04)

As you may know, the financial sector was preparing a new policy on Internet finance last year to support the development of Internet finance. However, proper regulation should be conducted under the existing regulatory framework. Although the document is still under discussion, I believe it will be published soon.

[Zhou Xiaochuan] (March 12, 2015 16:08:20)

Rounds of solicitation of ideas have been conducted in the industry. Please also note that Internet finance is quite different from P2P online lending, as one focus of Internet finance is Internet payment service. Another focus is crowdfunding, as you may know. Internet finance also covers online sales of other financial products such as insurance products. All these show that Internet finance is a broad concept.

[Zhou Xiaochuan] (March 12, 2015 16:08:35)

Since no license for a P2P online lending institution as a banking or depository financial institution has been officially applied for and obtained, a P2P online lending institution can’t be considered either a bank or a credit cooperative. In this sense, P2P online lending is still private finance.

[Zhou Xiaochuan] (March 12, 2015 16:12:15)

P2P online lending is different from other Internet financial business, which has been developing rapidly and healthily. As you may know, P2P online lending is more problematic, such as runaway, default and malpractices. Therefore, strengthening regulation of P2P online lending can be defined in the following two aspects: firstly, to promote the healthy development of P2P online lending, provide better services to customers and supplement the existing financial institutions. Secondly, to provide an outlet for thecustomers to redress an injustice and complain as the business goes wrong and the funds invested cannot be recovered. We should be very careful of such a case since it may cause moral hazards, and also should keep in mind the rules and risks associated with financialproducts and practices, especially online practices. Are you ready to take a risk when getting involved in such a case? Generally speaking, rules for Internet finance should be developed, but not likely to be very premature, since no one could be so smart as to foresee everything along with rapid development of technologies. Given this, regulatory rules will be introduced as business develops. With broad coverage, these rules are different from each other. For example, what rules will be developed for online payment? For crowfunding? And for P2P online lending? These should not be generalized.    

[Zhou Xiaochuan] (March 12, 2015 16:12:49)

Overall, I believe that the financial sector, the regulatory authorities and the governmentsare all highly concerned about this issue. Meanwhile,I'd like to stress that when participating in the business, especially the new business, customers should be able to identify risks and be prepared for such risks, while the rules developed should avoid causing moral hazards.

[Pan Gongsheng] (March 12, 2015 16:14:17)

P2P online lending is one of theformats of Internet finance, which includes third party payment, P2P, crowdfunding, financing and the products soldby banks, insurance, securities and asset companies via online platforms. The PBC encourages the innovative development of Internet finance and advocates proper classified regulation. Just as Mr. Zhou said just now, since Internet finance contains different formats, the regulatory rules, the legal relationship and the nature of risks associated with these formats are different, indicating that different regulatory rules and intensity are required for different formats. The PBC is currently taking the lead to develop opinions on Internet finance and how to promote its healthy development. We are now in the process of approving the measures and expect to release them as soon as possible. Thank you.

[CCTV, CNTV] (March 12, 2015 16:15:08)

Thank you. I’m a reporter from CCTV and CNTV. Premier Li Keqiang has said many times that China's monetary policy will not adopt the "free flooding" approach. We have noticed since last year that the central bank used a series of monetary instruments such as targeted RRR cuts and mortgaged supplementary lending to support the development of small and micro businesses and the “three rural” economy. However, some voices challenged that the targeted regulation is not transparent enough, and the data are not reliable. I’d like to ask Mr. Zhou about the effect of the targeted regulation. How can the central bank ensure that the funds are channeled into the weak links of economic development, instead of going to the non-real economy like the stock market? Thank you.

[Zhou Xiaochuan] (March 12, 2015 16:15:47)

You may know very well that the monetary policy is aggregate policy, as is written in textbooks. However, based on China’s specific demand and the transmissive and structural characteristics of monetary policies, we believe that monetary policy can have proper and structural features, which will help China with its economic restructuring. China is not alone in this effort. Many other countries have tested and explored the structural role of monetary policies, indicating monetary policies may have such an effect.

[Zhou Xiaochuan] (March 12, 2015 16:16:20)

While some monetary policies can support sustainable structural adjustment based on existing money stocks, such as differentiated deposit reserve ratio, some policies are increment-oriented. Given the lack of liquidity in the market, incremental capital is needed and the central bank will adjustand inject the capital into the economy, especially where capital is most needed and where structural optimization is most required. Initially, the capital will promote structuraladjustment. Some time after the injection, the capital will flow into the economy, when such monetary policies will play a weaker role in structural adjustment and become aggregate policies again.

[Zhou Xiaochuan] (March 12, 2015 16:17:35)

From this perspective, it's not advisable to overestimate the role of structural policies in liquidity management and release of monetary base, as overestimation is not necessarily in line with the reality. I believe we need some time before assessing these policies. Although we have witnessed considerable positive effect, we will be more objective and accurate in theassessment after a period of time. This also reflects one of my points, that is, I don't agree with that the capital should not go to the stock market, which seems unsupportive to the real economy.

[Zhou Xiaochuan] (March 12, 2015 16:18:50)

Many entities on the stock market ranging from petroleum, chemical engineering to building, infrastructure, agricultural and foodstuff companies, raise funds on the stock market and borrow money from banks through their bank accounts. These funds have directly supported the development of the real economy. In particular, most entities raise funds by issuing shares on the stock market, whereby promoting the development of the real economy. Indeed, some financial transactions in other links of some stock markets and financial markets may be unrelated to the real economy, but such practice is merely speculation. It is a lopsided view that the funds going to the stock market will not support the development of the real economy.

[Zhou Xiaochuan] (March 12, 2015 16:19:24)

Some argue that the self-circulation of funds in the financial market means isolation from the real economy, which is also inaccurate. Considerable financial activities, as we observe, are carried out to allocate resources and serve the real economy in a direct or indirect manner. However, it's true that some financial products are developed for speculation, which we should guard against. Compared with other countries and regions, China, including the CPC Central Committee, the State Council, the central bank and the whole financial community, stresses the role of finance in serving the real economy most.

[Zhou Xiaochuan] (March 12, 2015 16:20:47)

For your information, in 2008 when the global financial crisis broke out, it were China’s officials and scholars who were the first to point out that the cause of this crisis was the disconnection of some financial activities with the real economy, and stress that financial activities should be carried out to serve the real economy. Later at the Central Economic Work Conference, a long paragraph was dedicated to the role of financial services in serving the real economy. This is our situation. The enormous activities we are carrying out via monetary policy and financial market are highly related to the real economy. Thank you.   

[Tass News Agency] (March 12, 2015 16:41:51)

Thank you. I’mfrom Tass News Agency. Mr. Zhou, I'm a Russian, and I'm wondering what you would say about Sino-Russian financial cooperation?What’s theprogress of the payment systems in China and Russia? What do you think are the prospects for China and other countriesincluding Russia to settle transactions in their own currencies? Are you confident in these prospects? Thank you.   

[Zhou Xiaochuan] (March 12, 2015 16:42:08)

Since China and Russia are neighbors and big economies, the two sides cooperate deeply in trade investment and have been stressing the bilateral financial cooperation all the time. In addition to support to trade settlement and bilateral investment as well as cooperation in the financial market, new approaches to financial cooperation have emerged since the end of the global financial crisis, such as bilateral currency swap, direct listing of bilateral currencies, and encouraging trade and investment settlement in home currencies, including encouraging entry into the other's inter-bank market or capital market to make investments, and encouraging the central banks to manage their foreign exchange reserves using the other's currency and make investments in the other's market. Given these, the new approaches have been adopted between the two sides.

[Zhou Xiaochuan] (March 12, 2015 16:42:26)

China has made such arrangements with dozens of countries, including Russia, we should say. Undoubtedly, such arrangements may not be the most aggressive or the most effective at the beginning, and some are still in the starting phase, but anyway, the future potential will be fully tapped. Thank you.

[Wang Xiaoyun] (March 12, 2015 16:42:45)

This is the end of today's press conference. Thank you, reporters and distinguished guests.

[www.npc.gov.cn] (March 12, 2015 16:43:25)

Today's press conference is over. Thank you!

(Source: www.npc.gov.cn)