Statement by Mr. Dai Xianglong on the stability of the Chinese yuan and on
a number of other regional issues Statement by the Governor of the People's Bank of China,
Mr. Dai Xianglong, at a press conference held on 16th January 1998, on the stability of the
Chinese yuan, the lessons of the financial crisis in South-East Asia, the linked exchange rate
system of the Hong Kong Special Administrative Region and the impact of the collapse of
Peregrine on domestic business.
The commitment to hold the current yuan exchange rate steady
Judging from the balance of payments position and macroeconomic performance,
there is no possibility for the Chinese yuan to depreciate. I believe that the yuan will remain
stable and will not depreciate for the following reasons. First of all, over the past years, the value
of the yuan has appreciated and the exchange rate at the end of last year stood at around yuan
8.29 for a dollar. The trade surplus of last year reached $43 billion, and capital inflow was as
high as $60 billion, which, put together, contributed to the rise of foreign exchange reserves.
Following a successive increase over the years, the total amount of foreign exchange was $139.9
billion. In addition, this reserve position does not include another $2.5 billion to support the
South-East Asian countries to overcome their financial crisis and $2 billion otherwise retained
by foreign trade corporations. In the wake of the drastic currency depreciation for a number of
countries in South-East Asia, the pace of increase for China's foreign exchange reserves slowed
down, which in the end reduced the upward pressure for yuan. Second, the macroeconomic
prospects for this year look quite favourable. With continued price stability, GDP for this year is
expected to grow over 8%, which can be seen as another contributing factor for a steady
exchange rate. Third, the level of exchange rate is determined overall by foreign exchange
demand and supply. It is true that the currency depreciation in some South-East Asian countries
does increase the pressure on our export. But such a pressure is quite limited given the fact that
commodities from China and their destination are different from those of South-East Asian
countries. Fourth the labour cost in China is significantly lower in comparison with South-East
Asian countries, and in fact 50% of our export is in the form of processing of imported material,
which is not subject to the influence of exchange rate fluctuation. Indeed, Chinese export
businesses can enhance their competitiveness via reducing cost and improving product mix. It
can be said with a high degree of certainty that prospects for the country's exports this year will
remain favourable. I would like to reaffirm our commitment to hold the yuan exchange rate
steady with no consideration for depreciation and to stand ready for the test of the market. This
commitment can be seen as our contribution to financial stability in Asia.
Over 8% GDP growth in 1998
The financial crisis in some South-East Asian countries will have some impact on
the growth rate for China, for example trade between China and South Korea. However, China
largely depends on its domestic market for growth. In 1998, China will continue to expand its
export market and increase its domestic investment. With continued price stability, GDP is
expected to grow over 8% in 1998. The slowdown of the GDP growth to 8.8% last year is
attributed to international factors and the sluggish growth of township and village enterprises.
We believe that supported by the vigorous measurers to address the adverse influence, we will
be able to maintain GDP growth over 8% in 1998.
To be specific, first of all we shall continue to pursue a moderately tight monetary
policy and make timely adjustment as necessary. Broad money will be expected to grow by
16-18%, narrow money by 17% and injection of cash by yuan 140 billion. More discount and
rediscount activities will be expected for commercial papers. Second, banks will be expected to
improve their services in support of new growth areas. The financing service for residential
houses will be improved so as to strongly support the growth of the market for residential
houses, to expand the scope of residential lending and remove the lending quotas imposed on
public housing projects for less privileged people. Loans denominated in foreign exchange will
be actively developed on the domestic market with a projected increase of 10-15% of foreign
currency denominated lending. The input for agriculture, railway, highway and high-tech
industry will be increased under the precondition of ensuring the service of loans. Finally, the
interest rate instrument will be used appropriately to adjust the money supply, but at this
moment the central bank has no intention to lower interest rates.
Toward the establishment of a modern financial system and a regulatory/supervisory system
In 1997 the financial sector functioned in a sound manner and contributed in a
significant way to economic development and social stability. In 1998 we will continue to
pursue a moderately tight monetary policy and make strong efforts toward the establishment of a
modern financial system and a regulatory/supervisory system to the extent that all financial
institutions will be properly regulated/supervised by law, and financial risks are properly
reduced in the interest of significantly improving the order in the financial industry and
promoting a high and steady growth of the economy. In so doing, the most crucial policy
measure is to reform the organisational structure of the central bank. The number of provincial
branches of the central bank will be reduced in a well-planned approach. A number of first-tier
branches across the judicial administrative line will be created so as to enhance independence,
authority and expertise of the central bank. In addition, with regard to commercial banks, their
provincial branches and branches located in provincial capital cities will be consolidated
gradually and the grassroots branches with overlapped businesses with their counterparts that
have incurred sustained losses will be removed. When conditions allow, urban commercial
banks will be created in 300 city centres with equity shares from local fiscal authorities with a
view to establishing a multi-layered financial system comprising different financial institutions.
The underlying nature of financial institutions requires the existence of a set of rules and
regulations for the management of the institutions. All these institutions shall function in
compliance with laws and regulations and no government agencies or individuals shall be
allowed to interfere with the business management of financial businesses. Again, these
institutions shall be required to assume managerial responsibility and risk inherent in the
business. Their internal control system shall be strengthened. The supervisory board shall be
established for all state-owned commercial banks. The lending quota imposed on these banks
will be removed and they will gradually adopt the basic asset and liability ratios and risk
management techniques for managing their balance sheets. With reference to internal practices
and in consideration of the country circumstances, we will improve the existing system for asset
classification and loan loss provisioning. Efforts will be made to improve the system for capital
replenishment in order to increase capital adequacy of financial institutions. In maintaining the
order in financial industry, we shall follow the principle of segregating commercial banking
from securities and trust businesses and close all unlicensed financial institutions. All these
measures will be phased in during the next three years according to a well designed plan. By the
decision of the State Council, we shall build a modern enterprise system, a modern financial and
regulatory system within a time framework of three years. I feel optimistic that state-owned
commercial banks and other commercial banks will operate under an new mechanism at the turn
of the century.
The lessons from the financial crisis in South-East Asian countries
Serious lessons can be drawn from the financial crisis in South-East Asian
countries. This is also true for China despite the fact that the country started early in 1993 to cap
the bubbles in the economy. The major lessons for us can be summarised as follows: first of all,
it is essential to maintain an equilibrium for aggregate demand and supply, and especially to be
on guard against the bubbles in the real estate and stock market; second, the structure of external
borrowing should be proper and external borrowing by domestic businesses should be well
regulated. Before the crisis, fiscal deficits were small, economic fundamentals were sound and
central bank reserves were high. The underlying cause for the crisis is the over indebtedness of
business entities, especially the large amount of short-term borrowing not necessarily reported to
the central bank. Given what has happened, China will continue to favour foreign direct
investment and long-term commercial borrowing as a general policy. At the same time, external
borrowing by domestic businesses shall be reviewed very carefully and subject to a ceiling;
third, efforts shall be made to actively pursue the development of capital market and gradually
achieve capital account convertibility for the renminbi. On top of that, the country must maintain
substantial foreign exchange reserves; fourth, a safe and sound financial system must be in place,
and no government agencies or individuals should interfere with the business operations of
commercial banks. In an effort to ensure the stability of financial industry and reduce financial
risk, a dozen policy measures have been introduced. A better structured financial system is sure
to emerge in China three years later.
A strong commitment to an open policy
We shall not abandon the open policy simply because of the financial crisis in
South-East Asia. By the end of 1997, 173 foreign financial institutions were licensed to operate
in China with total assets amounting to $36 billion. The Chinese banks, insurance and securities
companies had 687 overseas establishments actively developing businesses abroad. We will
continue to grant licenses for foreign banks and insurance companies and authorise more foreign
banks to do local currency business on a trial basis. However, we would be more cautious in this
regard.
China as a safe haven for foreign investment in Asia
With good reason, China can be expected to maintain its status as the second
largest recipient for foreign direct investment. Although the contractual amount of FDI has
decreased to a certain extent, the amount of actual investment has been on the rise, particularly
by big multinational corporations. China has a stable political situation, a strong currency and a
good climate for foreign investment and lower tariffs. A new policy was announced recently
whereby the import of equipment by investing foreign businesses shall be exempt from value
added tax for imports. Therefore, China is very attractive for foreign investment.
The commitment of the government of Hong Kong Special Administrative Region to hold the
Hong Kong dollar steady
The financial crisis in South-East Asia is not over yet and the possibility of
another attack on Hong Kong's financial market still remains. So far, the government of the
Hong Kong Special Administrative Region has introduced a number of measures to protect the
stability of the Hong Kong dollar and its financial market, one of which is to maintain the Hong
Kong dollar peg. The linked exchange rate system introduced more than ten years ago has
contributed in a significant way to stabilising the Hong Kong economy. At present, Hong Kong
has strong economic fundamentals, a sound banking system, large foreign exchange reserves and
sufficient experience in regulating the economy. Therefore, the linked exchange rate system will
remain unchanged and experience has shown that this can be done and will be done. In
defending the exchange rate, interest rates in Hong Kong rose and caused the drop of prices on
the stock market. Although banks' profitability has declined, the profitability ratio for Hong
Kong banks remains the highest in the whole world. Indeed, 30% drop of the real estate price is
a correction of overvalued real estate in Hong Kong and can prove to be conducive to improving
the competitiveness of Hong Kong.