Q: From a
perspective of an economist, how do you comment on Zhou Xiaochuan and his nearly
16 years’ work at PBOC?
A: I think
governor Zhou has made a significant contribution, not only to the bank, but
also to the health and well-being of the Chinese economy, and I’m glad to
provide specific as you like what I have in mind in both regards.
Q: Can you briefly
comment on his contribution on China’s financial market or reform?
A: Yes. Let me
start off with his role at PBOC, and I think what’s clear to monetary economic
sense of central banker outside China, is that during governor Zhou’s time in
office, the PBOC has become significantly more professionalized, compared to
banks in early history. And I point not only to governor Zhou himself in the
way which he has run the bank and represented abroad, and also articulated the
monetary policy, but to many of the economists whom he has brought into the
As for the
comment, I think governor Zhou deserves a lot of credit for attracting, maintaining
and supporting such a high level group of people, and many others as well. I
would begin with saluting governor Zhou’s success at professionalizing the
Now next, I would
turn to the success of the policy during governor Zhou’s term. And there I
would point to three elements that strike me as important and successful.
First, if you look
back to period before governor Zhou took office, inflation in China was both
high and volatile, and also the growth of money and credits was relatively
unrestrained in various periods. I think governor Zhou has done an excellent
job in steering Chinese monetary policy so that inflation has become much
better behaved, and the growth of money and credits was much more restrained, that
after all is the central task of monetary policy in any economy. And I think
the PBOC gets high marks now, for the way in which they’ve been able to make a
lot of progress in this area during governor Zhou’s term in office, I think
that’s a real achievement for him.
specifically, the rest of the world is extremely impressed with the way in
which China manage to maintain its economic growth in the aftermath of the
worldwide financial crisis of 2007-2009. I remember being in China, maybe
2009.I recall the foreign economists were there who study China, many of them
were extremely skeptical that China would be able to maintain its growth rate.
At the same time certainly the developed countries were experiencing a severe
downturn, many of them like the United States was in the worst economic
downturn since The Great Depression of the 1930s, the Chinese economists
present were quite confident that China’s economic growth will continue, and
they were right, they turned out to be exactly right. We all know this has to
do with many things other than simply monetary policy and has to do with
governmental investment programs, and other contributions. But nonetheless, it
took some effort on the part of PBOC monetary policy to make that happen as
well, so I think it was a significant economic event that took place during
governor Zhou’s term.
And the third and
the last element that I want to point to, is the period of extreme volatility
both in the RMB exchange rate and also in the prices on the China’s security
market that China sustained a few years ago. This could have been very bad for
China and Chinese economic growth, but it wasn’t, it turned out China managed
to work through this period of volatility and thrived very well. Once again, I’m
sure this had to do with many elements of China’s policy other than just PBOC
is doing, but for sure PBOC had a large part to do with it. This also happened
on governor Zhou’s term, and I would give him a lot of credit for that as well.
Those are the
three things I had in mind.
Q: But you know, in
order to cope with the financial crisis in 2008, the balance sheet of PBOC
expanded rapidly, some people didn’t agree with Zhou’s measures taken at that
time, how do you like these policies?
A: I would look at
the balance sheet expansion and like what other central banks were doing. Look
at my own country here in the United States, before the financial crisis, the
balance sheet of the Federal Reserve system was about 800 billion dollars, the
peak was 4.5 trillion dollars, so that means the balance sheet of Federal
Reserve multiplied by a factor about 5.If you look at other central banks
around the developed world, the multiple was similarly about 5.Bank of England
and European Central Bank it’s about 3-4, although they are still there, not
through yet. And the Bank of Japan similar multiple, the Swedish Riksbank was
about a multiple of 3.So in all of these cases, central banks did the policy
that governor Zhou pursued, it was in keeping with other well-run central banks
were doing at the time, so I certainly would not be critical.
Q: So I think from
your perspective, you think Zhou is quite a successful and outstanding governor.
A:Yes,I do, I
think he will be remembered in the future, in the same way that we look back at
some of the crucial governors, we would call them the Chairman of Federal
Reserve, people like Paul Volcker, I’m guessing he will be remembered in that way
in the future.
Q: I would like to
know what do you think of development and trend of China’s financial market
after Zhou retires?
A: Well, I think
there are still some tasks to be done. The most obvious one, at least most
obvious to me, is dealing with the legacy of bad debts. I’m talking in part of
the banks of course. But also, even the bad debts held by various prevention
and even local governments, we all know that a large part of China’s economic
growth in recent years has been financed by debts. Many of these debts are not
really good debts in the way that we at least think of them.
So I think working
through that legacy is going to take China quite a bit of time, it’s a slow
process, and the magnitude of the problem in China is very large. I’m confident
that it can be handled, so I don’t think this is any kind of substantial
threat, but it is a real problem that needs to be taken care of. At least
according to western press, some of the recent actions by the government seemed
to show that they are very serious about planning to make progress, that’s one
area in which I would think that progress need to be made.
I think the second
would have to do with is, what I would call professionalization of the banks in
my sense, in meeting people that are the personnel at the top level of the big
four banks, in their positions, for political reasons rather than because they
are the right people. I’m an economist, but I would hope that over time, China
will evolve a way of allowing those institutions to be run in a more
Q: Could you talk
about what do you think is the biggest challenge for RMB to be an international
A: Well, it’s not
just the challenge for the currency, it’s the challenge for the market behind
the currency, the security of market. Because when you talk about people
holding dollars, yes, I understand some people broad hold dollar deposits, that’s
not really what we mean. For example, when we say China holds however many
trillions of dollars, the dollars that China holds, we don’t mean they’re
holding dollar deposits, we mean they’re holding various assets denominated in
dollars. So talking about the use of currency internationally, we’re really
talking about the ability of international investors to participate in a
country’s security market, it has to do in the first instance with the trading,
rules also has to do with what security is there to buy in the first place. So
when it go back to the dollar, when we’re talking about people holding dollars,
that means mostly they’re holding things like treasury deals, they’re holding
things like Bank CDs. So I think there are some developments of security
markets in China that needs to happen before we can think of RMB is having kind
of opportunities connected to it, that the dollar is sterling and the Euro and
other country’s currencies like that have.
Q: You know, that
RMB has joined SDR for two years, do you think this will have a large impact
for RMB to be internationalized?
A: No, I don’t
think so. I’ve always been very skeptical of the SDR, I don’t think it has
anything more than symbolic importance, to me, it doesn’t matter a bit.
Q: So you think it
doesn’t make sense, only conceptional?
A: Yeah, I don’t
think it has much practical significance.
Q: Did you notice that
there has been a rapid appreciation of RMB recently?
Q: And also the
dollar index has recently been a little bit weakened, what do you think about
this kind of appreciation, maybe relatively appreciated and depreciated?
A: I don’t have
any view over a short run, thinking as an economist, it’s not helpful for
assessing currency fluctuation in a short run. I think over a long period of
time however, it’s likely that at least on a real basis, the RMB will
appreciate relatively to the dollar, and the dollar will depreciate relatively
not only to the RMB, but to other currencies as well. And this is just a matter
of long run supply and demand for currencies, in part driven by notions of
trade flows, but also by portfolio diversification I think. 25 years from now
for example, I believe the role of dollar in international portfolios will be
small than it is today, I believe the role of RMB will be larger, and that kind
of shift is bound to affect currency values over the long run.
Q: Do you think
RMB is a safe currency? I mean for foreign exchange reserve to avoid the risks
from international financial market?
A: I don’t think
it is there yet, over some periods of time, I’m confident that will happen, but
I don’t think RMB is there yet. It goes back to the same issue of investment
possibility and liquidity of market and safety of assets that we were talking
Q: So you think
there is still a long way to go?
A:I guess I don’t
know how fast the transition will be, let’s say 20 years, I would like to think
the transition will be completed by then, but maybe faster, I have no idea.
Q: Do you think
the RMB and China’s financial policies have enough impact on the world’s
A: I think it
certainly does have an impact on the world’s economy, measured in terms that
China is already the second largest economy. I don’t know what the latest
forecast is, but within several short number of years, China will become the
world’s largest economy in real terms. And China is increasingly involved in international
investment flows, and markets open, China is already involved in trade flows, so
what happens in China is what happens in Chinese currency, of course it is very
important for the rest of the world.
Q:We all know that
leadership of Federal Reserve and PBOC has both changed recently, Powell has
come to his power, so what do you think of financial trends of China and the US
will be like? And the trends of financial policies of these two countries will
A: I think it will
be very interesting. Talking about the United States, as you know, we have a
new chairman of Federal Reserve, we have new people in the US treasury, and I
think it remains to be seen whether the financial regulatory policy of the
United States will remain the same or will go in very unfortunate direction. We
had some amounted new regulation put in place, following 2007 to 2009 financial
crisis, that regulation was not perfect by any means, I think the effort by
Trump administration and many member of the Congress to remove some of the
regulations is very wrong-headed, that is likely to open the way for the kinds
of abuses with the banks and even what we call the Shadow Banking System. Stood
the high crisis we had 10 years ago, I hope regulation is not relaxed in that
Now China is a
different Case, China has different problems and different structure. I think
the need for vigilance is real, looking at what happened 10 years ago shows the
need for serious regulation. There was a view associated with people like Alan
Greenspan, for example, the financial system is self-regulating, and I think
many of those view was wrong before, but for anybody who didn’t know those view
was wrong, he should have learned it was wrong from the crisis. The attempt
here to roll back regulation is wrong-headed, I hope other countries do not
move in that direction.
Q: You know, Chinese
people pay much attention to the Fed’s policy, so how much do you think China’s
economy is linked to the policy of Fed?
A: Oh, that’s a
very good question.
Q: Many people are
afraid that China’s economy will be influenced by Fed’s policy of interest
A:I think that is
true, behind what you said is a valid point that the dollar plays a
disproportionate role in the world’s financial system, therefore when the
United States raises interest rates, then interest rates around the world will
go up, I think that is very true. So from perspective of a country like China, I
think that means that the task which I indicated before, getting the bad debt
problems under controls is all the more important, because those debts that are
hard to service today’s interest rates will be even harder to service when
interest rates go up.
Q: Will there be
any conflict between China and the US? Regarding the financial fields?
A: No, I don’t
think so. Country’s interests are not 100% aligned, that never happens, because
countries have different production bases, different demand bases and so forth,
I don’t see there is any need to believe that there is an inevitable conflict.