Yi Gang's Speach at IMF Per Jacobsson Lecture Yi Gang: Deputy Governor, People's Bank of China, on behalf of Zhou Xiaochuan, Governor of the People's Bank of China I'm going to deliver Mr Zhou Xiaochuan's paper - China's Monetary Policy Since 2000. The Chinese economy challenges are the followings: 1st Chinese economy stage is as a developing country. Also we're facing theinflationarypressure. The driving forces areurbanizationand industrialization. So you can see many things are going on at the same time. Also we have reforms: banking reforms, exchange rate regime liberalization. 4th China isopeningup. China joint the WTO 2000. We face a lot of challenges like the legal perspective, etc. Also we not only need to consider domestic issues but alsoextraissues. More than 30 years ago, we were still a closed economy, we rarely consider the rest of the world. But now it's acompletelydifferent picture. And you see in this process, we accumulated a lot of foreign reserves. Also another challenge,becausethe liquidity is plenty, and also China is in a process of changing to market economy, which is ruled by law, and property right is protected. So in this process, because the transition, and protection ofpropertyright, the housing prices went up quite dramatically. So you're facing a lot of challenge, we want to maintain growth, control inflation rate, etc. Theessenceof this paper is the how monetary policy can be applied to this very challenging condition. The 1st thing: control inflation is our No1 job. As central banker, we have to control the inflation.Everybodyis veryenthusiasticabout the economic growth. As central banker, we need to remind general public and central government the limitation of resources, capacity,environmentetc. Keep in mind that the first thing in our central banker's mind is control inflation. 2nd consideration: China is a developing country. Inflation targeting is the only objective. In China, we have a multi-objective task for central bank. 1) inflation; 2) growth; 3) jobs creation; 4) try to maintain internal external balance. we have to consider all of the four. In our mind, those four are not equally weighted. Inflation is heavily weighted but we also need to take care of others. 3rd consideration: financial stability and reform. How to carry out a sound monetary policy? We have to have a stable market. If you don't have, you need to establish a stable market first. Many people said that China should liberalize the interest rate. But our banking was in a very bad shape 15 years ago. In late 1990s, technically speaking, most national banks have been already bankrupt. At that situation, how could you conduct out the liberalization? In terms of the financial reform. Our principle is that China has to feed itself by its own agricultural production . Basically, China can feed itself. If you want the good foundation in agriculture, you need sound financial support. Rural credit cooperatives is very important. For them: money capital in exchange for sound financial reforms. For now, Chinese banks are very profitable, capital reserve ratio is high. If you look at the top 10 banks in the SS, the top 3/4 are from China. 4th consideration: central bank changes from direct intervention to market oriented monetary tool. Direct intervention means approval first and quota second. Gradually we built up monetary tools: open market operation, etc. 5th consideration: exchange rate reform. There are a lot of debate about China exchange rate regime in the past decade. We started to consider the exchange reform on 2002. When governor Zhou became the Governor of the central bank. Before we reform it, we have to have the banking reform, and we need to relax some foreign exchange control. If you say the demand and supply should determine the exchange rate, but where is the market at that time? you have to establish exchange rate market first. We established stock market, etc, those are the homework we need to do. Since 2005 up to now, RMB's flexibility has been increased, the nominal exchange rate has been appreciated 30%. A good news, in the past 4 quarters the central bank has little control on the exchange rate and the official reserves in the past 5 quarters has been flat. 6th consideration: how to ** the access to liquidity.There is one problem. In the process in conducting monetary policy, Chinese central bank bought a lot of US dollar, in order to buy those we actually injected RMB in the system. The other method is using the government bonds. Another instrument, we increased required reserve ratio. It's a very old instrument for most central bank. But in China, it's a very important way. We increase it to absorb the extra liquidity in the market. From 2003 to 2010, 36 times, including 32 increase and 4 decrease. 7th consideration: interest rate liberalization and how we use the spread of interest rate. Right now, central bank control over in interest rate is much less than most people thought. We control the ceiling of deposit rate and floor of lending rate. And all the market rates are liberalized, including money market rate, bond market rate, trust fund rate, etc. Money market fixed income rate inter banking rate are all liberalized. Shanghai Interbank Interest rate, SIBOR (the Chinese version of LIBOR). We think SIBOR is successful so far. We have a set of rules and methods to supervise the SIBOR to encourage banks to tell the truth. We compare the report SIBOR and market SIBOR and check the discrepancies. Also deposit and lending spread is very important to avoid credit crunch and over lending. We need to consider internal andexternalmarket. 8th consideration: how monetary policy respond to global market crisis. Those 8 points are main points in Governor Zhou's paper.
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