The People’s Bank of China’s Policy Measures

Victor H. Fischer, PhD

I served in all commissioned ranks from a second Lieutenant to a Major General. And during that time, I spent most of my time being a high-class muscle man for Big Business, for Wall Street, and for the bankers. In short, I was a racketeer for capitalism. Smedley Butler

In a country well governed, poverty is something to be ashamed of. In a country badly governed, wealth is something to be ashamed of. Confucius

The lack of money is the root of all evil. Mark Twain

Transcript of Governor Zhou Xiaochuan’s, March 10, 2016, Press Conference

YI Gang: Ladies and gentlemen, friends from the press, good morning! Welcome to today’s press conference. With the progress made in China’s reform and opening-up and the growing size of the Chinese economy, the People’s Bank of China’s policy measures in macro-economic management and reform and opening-up of the financial sector have received a lot of attention both at home and abroad. There have been a lot of reports in the press, while the public also hope very much to hear more of the voices of the central bank.

Tonight, the G20 Finance Ministers and Central Bank Governors will meet in Shanghai. Governor Zhou Xiaochuan, who is now in Shanghai for the meeting, is available this morning to answer your questions.

To facilitate communication with friends from the press, we have prepared and distributed this morning a bilingual pamphlet, Commonly Asked Questions by the Media, which includes 16 questions on G20, the Chinese economy and monetary policy.

Today’s press conference will focus on the G20, the Chinese economy and financial system. In a few days’ time, Governor Zhou will attend a press conference during the annual sessions of the National People’s Congress and the Chinese People’s Political Consultative Conference, where he will answer questions related to the annual sessions.

I now give the floor to Governor Zhou Xiaochuan for his opening remarks.

The People’s Bank of China's Policy Measures

ZHOU Xiaochuan: Good morning everyone. Welcome to the press conference. As Mr. Yi Gang said, the G20 Finance Ministers and Central Bank Governors meeting will be held later today and tomorrow. The G20 has played an important role in recent years as an important platform for major economies to coordinate on macro-economic policies, promote cooperation, and foster global growth and financial stability. Significant progress has been made in addressing the global financial crisis, promoting financial regulatory reform including through the adoption and implementation of Basel III, bringing about consensus on the IMF quota and governance reform, and facilitating global cooperation on taxation.

China is an important player in the G20. President Xi Jinping attended the summit meetings in St. Petersburg a few years ago, in Brisbane the year before last and in Antalya last year. Within the G20, China has played her due role as a major economy and has been working hard to find solutions to the various issues on the G20’s agenda.

During the China Presidency this year, we hope to beef up our endeavor. There will be a summit meeting, which will certainly attract a lot of attention; in addition, there will be four Ministers and Governors meetings, several deputies meetings and other supporting meetings. The meeting that will start tonight is the first Finance Ministers and Central Governors Meeting this year. In the opening remarks during the just concluded IIF meeting, I covered the topics that are being debated in the G20, in particular the following to which the PBC pays special attention. First, we hope to promote and enhance policy coordination in G20 and take active measures to support growth and maintain financial stability; second, we want to continue the discussion on how to improve international financial architecture and build a more stable and orderly international monetary and financial system; third, we will continue to promote the global financial sector reform, and study on how to address the emerging new risks and vulnerabilities in the financial system; furthermore, we want to promote the improvement of financial market infrastructures, and financial inclusion. A new topic is the study of green finance aimed at mobilizing more resources for green investment. These are my opening remarks. Yi Gang and I are ready to answer your questions.

YI Gang: Thank you, Governor Zhou. The floor is now open for questions. Please identify yourself and your agency when you ask questions. Each agency may ask only one question so that other journalists will get opportunities to ask questions.

Xinhua News Agency: Thank you. I am with the Xinhua News Agency. The size of official foreign exchange reserve has shrunk for several months in a row. In January alone, the decline was more than US$100 billion. Governor Zhou, are you concerned about such a large decline? When it comes to the volume of exchange reserve, is there a safe lower limit, or a bottom line, that we must keep? What new measures has the central bank taken to address capital outflows?

ZHOU Xiaochuan: The volume of China’s foreign exchange reserve has never been a constant. It is not like the reserve of a given oil field which may be depleted. Foreign exchange reserve is, to some extent, like the water in a reservoir. Water flow in from the upper stream and flow out to the lower stream.

Changes in foreign exchange reserve have undergone two phases, including a period of shortage in the 1990s and a period of rapid build-up beginning from 2002. At some time during the second phase, the foreign exchange reserve was deemed to have grown too fast and the volume more than adequate. The international community also included this concern in G20 documents, which referred to the imbalances and excessive reserve accumulation in some countries. Excessive implies that the foreign exchange reserve should go down. The build-up of reserve does not follow a direct line, and will decline after reaching a turning point. It is fair to say that capital flows in most cases are normal, though some people believe that the foreign exchange reserve fell at an overly fast pace last year. There are many factors behind this decline; therefore, policy responses are multifaceted. As for the question you raised about what is the proper level of foreign exchange reserve, the academia has put forward various points of views. In the past, foreign exchange reserve was deemed sufficient if it is enough to pay for three months’ import bills. But many opinions have changed, and the three-month import equivalent view has lost its popularity. Several mainstream theories deserve mentioning, including the reserve adequacy criteria of the IMF. However, it is difficult to say that there is a dominating view in this regard. At present, there is nothing to worry about China’s external payment capability. Policy wise, in order to keep the foreign exchange reserve at a reasonable and normal level, it is important to adopt proper macroeconomic policies aimed at reducing imbalances, so as to ensure balanced growth.

The recent supply-side structural reforms are critical to maintaining the health of the macro-economy. It implies that we should have the right exchange rate policy, as inappropriate exchange rate policy will also lead to excessive capital flows.

Finally, global developments also deserve noticing. Changes in other countries and developments in the international market could cause changes in capital flows, in particular for emerging market economies. Therefore, international coordination and joint efforts are needed to mitigate spillover.

Reuters: Good morning, Governor Zhou. I am from the Reuters. What’s your assessment of China’s capital outflows? What are the implications for China’s monetary policy? Recently, PBC officials have commented that cutting interest rate and the reserve requirement ratio might also affect the RMB exchange rate. What’s your view on the establishment of an interest rate corridor in the next two years?

ZHOU Xiaochuan: I’ve touched upon the topic of capital outflows. From the perspective of macroeconomic policy, strength of the economy and confidence are the most important. Volatilities on the international markets may affect people’s confidence in the Chinese economy. If we can make the major macroeconomic policies more convincing and sustain stable and healthy economic development, people will have more confidence in China’s economy and the structural reform. As a result, despite temporary fluctuations in capital flows, the market will gradually return to rationality, without triggering more problems.

As for the monetary policy, for such a major economy as China, when making policy decisions, a more important consideration is the overall macroeconomic developments in China, rather than developments elsewhere or capital flows. Therefore, we will continue to implement a prudent monetary policy. Decisions concerning interest rate and monetary supply would be made primarily with a view to promoting healthy development of the domestic economy, and to facilitating the shift under the new normal to a new growth pattern, which is healthier, more sustainable and better structured.

One of the factors is, as you mentioned just now, that monetary policy is gradually shifting from reliance on quantity-based measures to price-based instruments. Interest rate will assume a more important role and send out clearer signals, and should not deviate too much. Therefore, an interest rate corridor will be set up gradually. We are in the process of establishing a corridor, and people begin to pay more attention and get used to such a transition. The middle interest rate of the corridor used to be the benchmark interest rates, and now it relies more on the interest rates from the central bank’s open market operations. If the interest rate deviates too much from the middle rate, the central bank will respond in the open market operations and guide it to return to a reasonable range.

CCTV: Good morning, Governor Zhou. I am from the CCTV. Since the latter half of 2015, currencies of emerging market economies have seen large depreciations. Japan and the ECB have continued quantitative easing policies, and the world is entering a new round of competitive depreciation. Against this backdrop, there is growing call for strengthened international cooperation, in particular for the major economies to set up an exchange rate coordination mechanism to intervene jointly in the foreign exchange market. What’s your comment on this? Do you think it is necessary to establish such a coordination mechanism?

ZHOU Xiaochuan: First of all, the recent volatilities on the international market are not limited to the foreign exchange market. Other financial markets have also undergone fluctuations, both of which are widely watched.

In view of the changing situation, G20 is a mechanism that strengthens cross-border policy coordination. Under the G20 framework, issues such as better policy coordination, overcoming the crisis, achieving strong, sustainable and balanced growth are discussed.

As for whether the G20 will coordinate on exchange rate, this was not done in the past. Since the issue is being raised, let’s wait and see how the G20 will deliberate on this issue in the next couple of days. Let me point out that coordination of macroeconomic and growth policies cover a wide range of issues, not necessarily limited to one specific policy.

As for the question of whether there is competitive depreciation, many countries resort to competitive depreciation in a bid to win export competitiveness. China has for long opposed competitive depreciation and the practice of gaining export competitiveness through depreciation. At the same time, China’s exports remain strong in general. The net export registered a large amount, and surplus of trade in goods posted nearly USD600 billion last year. So we will not join the rank of competitive depreciation in order to boost exports. This has been reiterated by Premier Li Keqiang on many occasions. In our view, the G20 will emphasize on structural reforms and promoting strong, sustainable and balanced growth of the world economy, through aggregate demand management, and make effective coordination efforts in these areas. Thank you!

Bloomberg: Good morning. I am with the Bloomberg. My question is how should the market understand the PBC’s policy of pegging a basket of currencies? As the mechanism is also referring to U.S. dollar, which should the market focus on?

ZHOU Xiaochuan: As is known to all, the mechanism is officially put as “with reference to” a basket of currencies rather than “pegging” a basket of currencies. The mechanism with a reference to a basket of currencies was put in place for quite some time, but it’s progressing with twists and turns. This is mainly because, amid the diversification of global economy, multiple currencies are playing a role, while some currencies are playing increasingly important roles. Therefore, by “with reference to” a basket of currencies, we mean the formation of central parity is based on the transactions of the previous trading day on the forex market, and is also taking into consideration the movements of a basket of currencies.

Along with the diversification of global economy, the weights of various currencies are evolving, the basket of currencies will become ever more important. In reality, however, you may also know that the U.S. dollar is still the dominant currency in this basket, in all three major RMB exchange rate indices. Meanwhile, other currencies such as euro, Japanese yen, pound sterling and even emerging market currencies are all given appropriate weights.

In sum, the RMB exchange rate is referring to a basket of currencies, where the U.S. dollar has the largest weight. Thank you.

The Economic Daily: Good morning, Governor Zhou. I’m with The Economic Daily. There have been two waves of volatility in the exchange market since the exchange rate regime reform on August 11th, which has affected other components of the financial markets and triggered volatilities there. What’s the PBC’s thought on further mitigating systemic risks? What steps will be taken to avert cross impact among different segments of the financial market?

ZHOU Xiaochuan: Amid constant evolution of the world economy and Chinese economy, policy makers should design policies—including reform policies—very carefully, and try their best to take into consideration all relevant factors in advance, which is indeed challenging as there are many uncertainties.

It is important for the financial market to keep price around the equilibrium level, and to prevent the emergence and build-up of bubbles. This is the case not only on the foreign exchange market, but also other parts of the financial market. If a price on a financial market deviates too far away from the equilibrium level, correction pressures will mount inevitably.

Meanwhile, different segments of the financial market would have cross impacts on one another, and are sometimes synchronized. Therefore, when making adjustments to a specific policy, one should in theory take into consideration its potential impact on other parts of the financial market, and the possibility of mutually-reinforcing market movements. Internationally, a country’s domestic policy will have spillover effects on other countries. Therefore, despite of domestic goals, international considerations should also be taken account of when making policies.

That said, however, policy makers could not be expected to foresee everything. Therefore, on one hand, we would be more careful about potential impact on other markets when simulating the effect of policy measures. On the other, we should not be too timid to make essential reforms. Real improvements to the Chinese economy should be made, especially by pressing ahead with supply side structural reforms. Resolute actions should be taken, and remedies can be made even if there should be any problems.

As I’ve mentioned, we need to look at fundamentals of an economy. Financial markets tend to overreact in the short term, but for an economy with healthy, sustainable fundamentals, financial markets will come back to normal after temporary volatilities. Thank you!

The Economist: Good morning, Governor Zhou, I’m with The Economist. Thank you very much for holding this press conference. This is very helpful for the media, and the PBC as well. I hope there’ll be more press conferences in the future, in addition to the ones during the G20 meetings and during the NPC and CPPCC sessions. My question is on China’s debt level. The combined debt outstanding of the household, corporate, and government sectors has exceeded 250 percent of China’s GDP. Credit has been growing rapidly while growth rate is slowing down, indicating that the debt to GDP ratio will keep rising. What’s your view on this problem? Is there an upper limit on the debt to GDP ratio? Some other countries have already seen economic turmoil or even crises after going through a period of rapid debt expansion. What kind of performance do you think China’s economy will display in this regard?

ZHOU Xiaochuan: The Chinese government, including the central bank, pays close attention to this issue. We also do meticulous international comparison studies on it. We do find that that China’s debt to GDP ratio is relatively high, as you just said, and the debt to GDP ratio continues to rise. It calls for alertness. As to whether there is a benchmark beyond which problems will start to emerge, we do not find clear rules after very thorough studies. Nevertheless, we should remain vigilant to this issue in macroeconomic management.

Each country has its own circumstances and characteristics. So does China. We have had internal discussions on the special features. I like to emphasize three factors. The first is that China’s gross savings rate is high, at almost 50%. The concept of gross savings includes government savings, household savings, and corporate savings. Household savings is the most important, with corporate savings ranking the second. In contrast, the savings rates of most other countries in the world are between ten and twenty percent, and some are even below ten percent. This is not comparable.

Such large volume of savings is voluntary and needs to be used properly. As China’s capital market is still underdeveloped, most of the savings are channeled through the banking system, and some through the bond market. As these financial intermediaries turn savings into debt, China’s debt becomes somewhat higher than other countries’. We need to notice this factor in horizontal comparison.

The second factor concerns the development of the capital market. If a country’s equity financing and capital market is relatively well developed, lots of funds will become corporate equities. Its debt level could be lower. This is apparent from basic financing principles.

China has strong willingness and has made lots of efforts in developing an equity financing market. However, the capital market has its own natural process to develop and mature, and pushing too hard will only slow things down. During this process, indirect financing, in particular debt financing, will remain a major channel. Thus, we have a relatively high and increasing debt to GDP ratio.

Third, China started reform and opening-up at the end of 1970s. In the past, China was a relatively poor country with insufficient wealth accumulation, shown by low GDP per capita and little wealth per capita. We are not like some advanced countries that have relatively adequate wealth after accumulation of one to two hundred or even more years, and they do not need to borrow when they invest. Reform and opening-up has brought abundant opportunities to Chinese entrepreneurs who started from almost scratch. The entrepreneurs could only borrow to start their businesses and make investment. This is also one of the factors. We believe that the gradual accumulation of wealth by enterprises and households will reduce the lending for investment. We should have patience. We need to learn from international experiences and avoid potential problems caused by high debt ratios, while analyzing China’s own conditions prudently and finding ways to gradually relieve the debt pressures. Thank you.

CBN Daily: I am from CBN Daily. Since the global financial crisis, many countries have adopted macro-prudential reforms. The 13th Five-Year Plan has stipulated that reforms should improve the financial regulatory framework that fit the development of financial sector. What is your view on the optimum model of financial regulatory framework?

ZHOU Xiaochuan: Your question covers two aspects. The first one is about macro-prudential policy framework. Macro-prudential policy framework is one of the G20’s outcomes. Since the global financial crisis in 2008, members of the G20 have turned to the Basel Committee and the Financial Stability Board for their researches. Based on these researches, G20 leaders endorsed the use of macro-prudential policy framework to address the financial crisis. Such a framework includes strengthening financial regulation and the adoption of counter-cyclical policies to help avoid excessive economic fluctuation. Meanwhile, members of the G20 have either revised their financial regulation and evaluation indicator system based on studies of the financial crisis and lessons learned, or built new indicator systems to introduce macro-prudential regulation. Consensus has already been reached on this matter. In their respective implementation, members of the G20 need to consider their own circumstances such as institutional arrangements and legal environment. Therefore although G20 members have adopted the agreed macro-prudential policy framework, circumstances vary from country to country. Adopting the macro-prudential framework does not necessitate a reform of the regulatory system, which is a more complex and challenging topic. Since the outbreak of the global financial crisis, people have found financial regulatory systems unsatisfying and identified defects in these systems that may trigger the outbreak or accumulation of potential problems. As a result, G20 members are willing to reform the financial regulatory system. Reform efforts differ from country to country. Some are gradual and some are more resolute. Though there are certain tendencies, there is no universal model. Certain performance of the financial regulatory system in China in the global crisis was not satisfying either. In particular, the financial market turbulence in 2015 has prompted us to reflect on the necessary adjustments in the financial regulatory system. We are still thinking about it. One factor to take into account is that whether the new regulatory system will contribute to the effective operation of macro-prudential system and implementation of policy framework. Of course, we also need to consider other elements.

Hong Kong Commercial Daily: I am from the Hong Kong Commercial Daily. Now Europe and Japan have introduced negative interest rates, and the US has been sending out signals for a further interest rate hike. The monetary policies of major economies have diverged further. China has become increasingly important in this policy game. What are your suggestions and recommendations on building a safer global financial system?

ZHOU Xiaochuan: There are several aspects in your questions. First, countries may adopt different monetary policies. Some introduce negative interest rates and others may choose to raise their interest rates. Viewed from the perspective of traditional economics and monetary policy theories, this would be a normal phenomenon in a less globalized world where monetary policies are to adjust the domestic economy and focus on domestic aggregate demand. At that time, countries were not closely connected. Each had its own domestic economic situations, with different readings in indicators such as inflation and growth rates; some had short-supply problem, and some oversupply problem, meaning that the capacity utilization rate was not high. As such, countries adopted different monetary policies. It was natural to have such divergent monetary policies in the past.

But in the last two decades, globalization has accelerated. The spillover effect of major economies’ monetary policies has become more prominent. One country’s domestic monetary policy will have an impact on the other, and may influence capital flows and lead to arbitrage. Therefore, although every country will still make its monetary policy according to its own circumstances, it needs to take into consideration the spillover effect. Countries should at least enhance policy consultation and discussion, if not policy coordination. The G20, the BIS bimonthly meeting, the Financial Stability Board meeting are all international platforms for such policy discussion and communications.

Many topics such as how to deal with the spillover effect are still under discussion, and there is no clear answer.

As for financial safety, it is more related to crisis contagion, rather than the impact of monetary policy across countries under normal conditions. Financial crisis, once triggered, is likely to spread from country to country, which requires a safety system. To address crisis contagion, the international community, G20 in particular, has raised several proposals. I will not be exhaustive. The first is to deal with “too big to fail” institutions to prevent the cross-border conflicts of systemically important financial institutions including systemically important banks. The second is on cross-border cooperation of regulatory systems and convergence of regulatory standards. If a financial institution is regulated heavily in one jurisdiction and lightly in another, problems stemmed from a branch of that institution in one region will spread to branches in other regions. The third is cross-border resolution. If a financial institution operating in different countries goes bankruptcy, the problem will be contagious. Cross-border resolution also involves security and fairness. It needs to be rationalized and requires some preparation. Last but not the least, G20 has put forward a proposal to consider the core principles of deposit insurance. Not many people have noticed this. What is a safety net? With a safety net, the deposit insurance system can help limit the impact of crisis triggered by failures of financial institutions and prevent it from spreading. Cross-border contagion also exists. This is especially relevant for the Euro zone. The Euro zone has therefore made significant reforms on deposit insurance. It is a cross-border deposit insurance system although within one monetary union.

China Financial Times: I am with the China Financial Times. My question is about China’s monetary policy. In your recent remarks, you said many countries have become overly dependent on monetary policy in the wake of global financial crisis. What are the consequences and after-effects of excessive dependence on monetary policy? How to ensure reasonable and appropriate intensity?

ZHOU Xiaochuan: I did mention excessive dependence on monetary policy. But this is not only my personal view. It is in fact an issue being discussed internationally. I remember the International Monetary Fund discussed this two years ago when many people showed interest. As this is an academic topic, it is not surprising that there may be different views. The general background of this topic is that after the outbreak of crisis, countries had to take swift responses rather than allow situations to worsen. When recovery lacked momentum, policies on economic recovery would have to be mapped out as soon as possible. Three categories of policy options may be considered: monetary policy, fiscal policy and structural policy, including structural reform.

Monetary policy, in fact, is quite flexible. As in all countries, monetary policy is the preserve of central bank’s monetary policy committee under current economic system. All countries have some monetary policy tools on hand despite a few differences.

Fiscal policy is also relatively flexible, but it varies with countries. Some countries already run a relatively large deficit, and levels of total debt and government debt are excessively high. This has reduced the space for fiscal policy. That’s why we say fiscal space varies from one country to another. Some countries have some space, while others have less space. Besides, fiscal policy typically needs to be endorsed by the congress. Sometimes it may spark debate. Although fiscal policy is necessary, it may not be approved by the congress in time due to disputes. Then, you can’t avail yourself of this option. Fiscal policy has a bit more constraints.

Some structural policy measures take effect over the medium term. Sometimes, people do not want to wait for that long. When one catches a cold and comes down with a fever, we need to reduce the temperature first. Addressing the root cause also matters, but it may take time. In addition, some structural policy measures may cause pain, including, for instance, health care, pension and other labor market policy, and innovation policy. In particular, labor market policy may not be adopted smoothly due to potential pains. Consequently, all countries resort to monetary policy which can be formulated more rapidly.

I think monetary policy is effective. Monetary policy responses were appropriate during the crisis period and did help mitigate the crisis. It has played an important role in both weathering the crisis and speeding up the recovery.

However, other policies need to catch up, as adopting monetary policy alone may give rise to excessive reliance on this policy option. If used too much, monetary policy may become less effective. So I think global discussions in recent two to three years, including those at the G20, have suggested that monetary policy is used heavily and caution should be exercised, that is, don’t pin too high hopes on monetary policy. Instead, fiscal and structural policies need to be strengthened.

As for macroeconomic policies in general, there are both positive and negative effects for any policy tool. We always say that there are more policy objectives and less policy tools. So when you evaluate the impact of one policy tool, it certainly can deliver positive effects in one aspect, but may have some negative effects in other aspects. We need to strike a balance, but it may not necessarily be referred to as so-called after-effects. In a word, it may be boiled down to one point, that is, there has been frequent use of monetary policy, and now it is time to further underscore the use of fiscal policy as well as structural policy. In China, monetary policy mainly targets the adjustment of aggregate demand. Apart from continuing to properly implement policies targeting aggregate demand, we give more weight to supply-side structural reform and policy measures on the supply side.

Handelsblatt: Thank you very much, Governor, for giving me this opportunity. I am a journalist from the Handelsblatt. What’s your view on China’s social credit information system? How would it affect foreign companies operating in China?

ZHOU Xiaochuan: China is building a social credit information system that will better perform social credit evaluation, with both public services and partnership with the private sector. In addition, financial institutions are also making more efforts in this area, improving data with the use of big data technologies to provide information and evaluation of the majority of enterprises and individuals. This will facilitate the further development of financial system. In particular, this will improve the provision of funds to individuals of low-income and the financial services to medium, small and micro enterprises.

At the same time, it also helps to enhance basic code of conduct and discipline of the society, making people and enterprises more aware of their credit records in the system and the society more honest and trustworthy.

CBN Radio: Thank you Deputy Governor Yi Gang, for the opportunity of asking the last question. I am from CBN Radio, and my question is about the new policy on real estate jointly issued by the PBC and the CBRC. The policy lowered once again the proportion of down payment for mortgage loans borrowed for second homes, and many interpreted this as a signal of increasing leverage. Loans in January increased 2.5 trillion yuan, larger than the growth in last January by over 1 trillion yuan. Some even comment this as “turning on the tap of liquidity”. While the Central Economic Work Conference has decided that deleveraging will be an important task of structural reform of this year, how shall we look at the balance of increasing leverage and deleveraging when there is significant downward pressure on the economy? How shall we deleverage?

ZHOU Xiaochuan: The starting point of your question is correct. Lowering the terms of loans will help expand lending. At least the leverage of mortgage will be increased. Your question is logical, but we have the following considerations:

First, China has been under reform and transition, and most people did not have their own housing 20 years ago. The housing reforms abolished the system of distributing houses as welfare. People began to have their own homes. A lot of people still do not have their own, so normally there should be a stage of vigorous development for mortgage loans. In addition, during the process of urbanization, migrant workers who used to have houses in the village now work in the city and need to rent or buy apartments. These factors may lead to fast development of mortgage loans. Will large risks emerge from such rapid development? In the case of China, the share of mortgage loans in bank loans is relatively low. In many countries, retail loans, especially mortgage loans, account for as much as 40%-50% in bank loans, while the share in China is at a relatively low level of between 10 and 20 percent. Therefore, the banks also consider mortgage loans as a relatively safe category of products, with rooms for further development.

But the real estate market is sometimes sluggish and sometimes feverish, and needs a macro-prudential policy framework for counter-cyclical adjustment. One of the tools is down payment to value ratio. This ratio was 30% and now appropriately reduced because, in fact there is room for macro-prudential measures, and even with the reduction of the down payment ratio, the ratio of non-performing loan in mortgage loans is still significantly lower than other areas (such as loans to enterprises and real estate developers). Therefore, banks prefer the mortgage loans and are willing to develop.

Furthermore, under the macro and micro-prudential regulatory frameworks, future assessment will focus more on the overall health of banks, and give more autonomy to banks to decide the differentiated policies to different clients. Banks should have more flexibility to decide on the pricing and down payment of loans based on their evaluation of risks of individual clients. The overall asset quality of the bank should be more vigorously supervised in a comprehensive and balanced manner by the regulator. This will likely be a more flexible and more effective system. In the past, owing to the volatility in some markets, there were more direct provisions from the central bank and regulatory authorities. Direct and specific provisions produce positive impacts because that each bank shall comply with them. There is no space for negotiation.  But it also had disadvantages for lack of differentiation and flexibility. China is such a big country that the situation in one province is different from another, and the situation in large, medium, third-tier and fourth-tier cities are also different. Lack of flexibility for banks has shortcomings when all banks provide loans on terms which are set in Beijing. Thus, it is now necessary to enhance the overall macro-prudential regulation on financial institutions. At the same time, commercial banks and other financial institutions may have some discretion and flexibility in specific business, which in general will not compromise the control of overall risk.

From a macro perspective, if we in China want to control the leverage ratio, we should manage the overall leverage ratio. The key is to address excessive corporate leverage ratio. Some people are also concerned about whether the leverage of local governments is too high. But generally the leverage of retail consumer loans is not too high.

YI Gang: Thank you very much, Governor Zhou Xiaochuan, for answering so many question in simple languages. That concludes today’s press conference. Thank you


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