Zhou says China is ready for bolder reform

China has now transited to a new growth model and has a stable enough leverage ratio for it to be bolder in its reforms and liberalisation, People’s Bank of China (PBoC) governor Zhou Xiaochuan said today (March 9).

In what was likely to be his last press conference before he retires as central bank chief in April, Zhou commented on a wide range of topics on the Chinese economy, including financial reform and development, monetary policy, financial risk, cryptocurrency and even Hong Kong’s financial system.

Having issued harsh warnings on high leverage and a possible ‘Minsky moment’ in October, today Zhou said the rapid growth of debt in China has stabilised, citing the fact that broad money growth is now below the nominal GDP growth rate.

Furthermore, the growth model of China’s economy has evolved from quantity-driven to quality-driven, with a falling reliance on credit, Zhou told reporters on the sidelines of the ongoing Communist Party meetings.

Given the large base of M2 in China, Zhou said the “quality-led” growth model might not necessarily imply tighter liquidity, as broad money can be used more efficiently.

According to separate releases on the PBoC website today, China’s M2 grew 8.8% to 172.91 trillion yuan ($27.3 trillion) at the end of February, faster than an 8.6% increase a month earlier. The new credit in the economy, measured by the total social financing flow figure, picked up to 1.17 trillion yuan in February, 82.8 billion yuan higher than the same period last year.

More bold in reform

China is currently holding its annual legislative meeting, the National People’s Congress (NPC), and its top political advisory meeting, the Chinese People’s Political Consultative Conference. Together, these meetings are commonly known as the “two sessions”, and tend to last for around two weeks.

The 2,800 deputies of the NPC will vote on March 19 to approve the new government line-up for the next five years, including the central bank chief who will replace Zhou.

During his 15 years at the helm, Zhou has led the PBoC through various patches of financial distress and reform. At today’s press conference, he said China is now ready for bolder measures, such as accelerating market access measures to improve the connectivity between Chinese capital markets and other major global centres.

Zhou noted China had been a member of the World Trade Organization for several years, but said the country’s process of trade liberalisation had been limited by the 2008 crisis. The country is now in a “new stage” and can implement fresh reforms, he added.

Regarding renminbi internationalisation, Zhou said the authorities had taken the necessary steps to promote the currency, including renminbi usage in trade and investment as well as the inclusion of the Chinese currency in the International Monetary Fund’s special drawing rights basket.

He said the future of renminbi internationalisation depends crucially on market participants – how willing they are to use renminbi in terms of investment, settlement and asset valuation. It will be a “gradual process”, he suggested.

Future role of PBoC

Having focused on containing financial risk and encouraging deleveraging in 2017, the Communist Party is now focusing on constitutional and structural reforms.

Zhou said the central bank will have a “greater impact” in the financial regulatory framework in future, though he avoided giving much detail as the legislative meetings are still going on. Nevertheless, he said the tone of reform would be similar to that delivered in the government working conference in July last year.

In July 2017, Chinese president Xi Jinping ordered financial regulators to set up a “financial stability and development committee” under the PBoC to co-ordinate financial supervision.

According to his “personal experience”, Zhou said there are “some gaps in financial supervision”, as well as some financial regulations that need strengthening, and some risky financial institutions that need to be “dealt with promptly”.