Yi Gang: Building a modern central banking system to contribute to
Chinese modernization
Speech by Mr Yi Gang, Governor of the People's Bank of China, at the 2023 Annual
Conference of China Society for Finance & Banking / China Financial Forum, Beijing, 4
April 2023.
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Good morning, ladies and gentlemen!
It is a great pleasure to meet so many old friends today, including Mr. Eddie Yue, Chief
Executive of the Hong Kong Monetary Authority (HKMA), and to exchange ideas with
you face to face. Above all, on behalf of the China Society for Finance & Banking, I
would like to extend a very warm welcome to all the participants and express my
sincere gratitude for your close attention and long-standing support.
The theme this year is "Financial Sector's Role in Contributing to Chinese
Modernization", and I would like to take this opportunity to share my ideas on monetary
policies, financial stability, and financial services required for establishing a modern
central banking system.
It was proposed, both in the fourth and fifth plenary sessions of the 19th CPC Central
Committee as well as the 20th CPC National Congress, to establish a modern central
banking system. The Law of the People's Republic of China on the People's Bank of
China, first enacted in 1995 and amended in 2003, stipulates the responsibilities of the
People's Bank of China (PBOC) in a concise way, stating that the PBOC shall
"formulate and implement monetary policies, guard against and resolve financial risks,
and maintain financial stability". It also states that "the aim of monetary policies shall be
to maintain the stability of the value of the currency and thereby promote economic
growth". To this end, preserving currency stability and financial stability are two central
tasks of the PBOC, and a growing consensus has been reached on this point over
these years. Fulfilling these tasks, we will help promote full employment and economic
growth, thus contributing to Chinese modernization.
First, preserving currency stability.
Currency stability has two meanings: one is to stabilize consumer prices, and the other
is to keep the exchange rate basically stable. Stable consumer prices and exchange
rates serve to safeguard the pocketbooks of consumers, so that the money in
their hands won't depreciate. Fundamentally, this is a people-centered effort to
safeguard the interests of the broadest possible majority of the people.
In recent years, the world economy has suffered many unexpected shocks, and
great uncertainty exists concerning the economic environment and policy effects. We
have implemented a sound monetary policy, and have properly adjusted it based on our
"sound intuitions". Historically speaking, this "intuition" is our experience; from a
timeline perspective, it is the average of different cycles in the past; and from an
international perspective, it is the average among various regions. These dimensions of
intuition form a good basis for formulating forward-looking policies as they forecast the
situation after a cycle. Therefore, we formulate sound monetary policies based on
China's national conditions, with the average inter-temporal and inter-regional values
incorporated in the design from the timeline and international perspectives.
In terms of aggregates, we have released the "frozen" liquidity mainly by lowering the
required reserve ratio (RRR), which increases the money multiplier, thus achieving
reasonable growth of money and credit while keeping our central bank balance sheet
basically stable. Over the past five years, the PBOC's balance sheet expanded only
around 3 percent each year. Over the same period, China's broad money supply (M2)
and aggregate financing to the real economy (AFRE) have grown at an average annual
rate of around 10 percent, basically in line with the average annual growth rate of
nominal GDP, which stood at nearly 8 percent.
In terms of interest rates, we have likewise remained prudent and refrained from
going to extremes, thereby keeping the fluctuations of policy interest rates within a
relatively small range. For example, in 2018, amid the successive rate hikes of the
major central banks, the PBOC's open market operations (OMOs) rates remained
stable after an uptick of only 5 basis points at the beginning of the year. In 2020, in
response to the COVID-19 pandemic, some major central banks slashed interest
rates to almost zero, but the PBOC kept the OMO rates stable after a cut of 20 basis
points, and the market rates remained at an appropriate level accordingly. Since 2022,
in contrast to a series of aggressive interest rate hikes of the major central banks in the
world, we have lowered the rates to some extent instead of raising them. The OMO
rates were lowered by 20 basis points, and the market interest rates remained stable
with a slight decline. The interest rate is an important price of production factors and it
directly influences consumption, investment, balance of payments, etc. It will not be
good for economic growth, which is supposed to be steady and sustained, if the interest
rate is too high or too low. Over the past two decades, China's real interest rate has in
general remained slightly below the potential economic growth rate, which is
the "golden rule" level. Basically in line with the potential economic growth rate, it
met the requirements of keeping prices basically stable and played an important guiding
role in promoting macroeconomic balance and efficient allocation of resources. At the
same time, China's benchmark one-year deposit rate is 1.5 percent, and as commercial
banks usually raise the rate to around 2 percent, the people get an appropriate return
on their deposits. In short, our monetary policies are formulated under the
peoplecentered principle, and we have taken full account of their impact on the economy,
employment, investment, and the rate of return on the people's deposits in the process
of formulation.
we have pursued a managed floating exchange
As for exchange rates,
rate regime based on market supply and demand with reference to a basket of
currencies. The RMB exchange rate has moved in both directions with enhanced
resilience, playing its role as an automatic stabilizer in adjusting the macro economy
and the balance of payments. The exchange rate is another important macro-economic
variable. It is not parallel to interest rate in relationship, as it is mainly determined by
market supply and demand as well as expectations under the influence of interest rate
policies. Inflexibility of the exchange rate regime is a major constraint on the
independence of monetary policies and may lead to economic and financial fragility at
the macro level. Therefore, we have given the market a decisive role to play in
the formation of the exchange rate, so that the RMB exchange rate is determined by the
market in general. At the same time, we are committed to facilitating the purchases and
sales of foreign exchange. The ceiling for personal foreign exchange purchase is now
USD50,000 each year, which meets the needs of the vast majority of the people. The
FX purchases and sales are facilitated for enterprises and individuals, making it easier
for their education, travel and trade.
Our domestic prices and the RMB exchange rate have remained basically stable thanks
to the efforts at the national level to stabilize the prices of food and energy with their
supplies secured. Meanwhile, stable and moderate monetary and financial
conditions have laid a solid foundation for price stability. On the whole, our macro
policies have achieved desired results. China's consumer price index (CPI) went up by
2 percent year on year despite the soaring global inflation in 2022. Over the past five
and ten years, China's CPI has maintained an annual growth rate of 2 percent or so,
and the fluctuation is relatively small. In the past five years, the volatility of the
RMB exchange rate against the US dollar averaged around 4 percent,
slightly higher than before but lower than that of major currencies under the floating
exchange rate regime. This indicates that the RMB exchange rate is relatively stable. In
the past five years, the RMB exchange rate against the US dollar has been beyond 7
three times, in August 2019, in February 2020, and in September 2022, respectively.
For the first two rounds, it took five months for the RMB to return to below 7, and for the
third round last year, the process took three months. Driven by market supply and
demand, the movements indicate that China's foreign exchange market is resilient
enough to achieve dynamic equilibria.
Price stability and the basic stability of RMB exchange rate at an adaptive and
equilibrium level provide strong support for us to realize the strategic goal of Chinese
modernization. In 2022, China's total GDP reached RMB121 trillion, or approximately
USD18 trillion, with its per capita GDP standing at RMB86,000, or about USD12,700.
Over the past two decades, according to calculations by the Bank for International
Settlements, the real effective exchange rate of the RMB has appreciated by
approximately 40 percent, with an average annual appreciation of about 2 percent,
while the RMB exchange rate against the US dollar has appreciated by 20 percent,
with an average annual appreciation of 1 percent. Thanks to the RMB appreciation,
China's total GDP and per capita GDP maintained steady growth even after
conversion into other international currencies. In comparison, some countries were
troubled by "middle-income trap" as their currencies experienced significant
depreciation.
Second, maintaining financial stability.
While maintaining currency stability, the PBOC also needs to maintain financial stability.
Currency stability and financial stability are coherent in most cases, but the former does
not necessarily guarantee the latter. Any financial risk would harm the interests of the
people and even trigger social problems.
In recent years, we have kept improving our interest rate policies under the rules of
market economy, allowing for two-way RMB exchange rate fluctuation driven by the
market. This helps maintain stable economic and financial performance and forestall
systemic financial risks at the macro level. Recent cases show that when macro
variables go wrong, instability and financial risks will arise. Domestically, our macro
variables such as interest rates, the RMB exchange rate, economic growth rate and
unemployment rate are reasonable, coordinated, and stable, which helps a lot in
preventing systemic financial risks. At the same time, we have taken a series of
measures to contain financial risks and we have firmly defended the bottom
line whereby no systemic risks will occur. We've steadily and properly defused the risks
of key enterprise groups and financial institutions. The number of high-risk small and
medium-sized financial institutions has fallen by half from the peak of over 600 to over
300. The aggregate scale of high-risk "quasi-credit" shadow banks has been slashed by
about RMB30 trillion. Nearly 5,000 P2P online lenders have been shut down. We've
worked to ensure that all parties, including financial institutions and their shareholders,
regulators, and local governments, fulfill their respective responsibilities, so that the
proverb "what goes around comes around" becomes a reality and all stakeholders have
proper expectations on the ground of positive incentives. We've advanced the
construction of financial infrastructures, pushed for the formulation of the Law on
Financial Stability, and established the Financial Stability Fund. All these efforts are
aimed at maintaining financial stability and safeguarding the legitimate rights and
interests of depositors, small and medium investors, as well as the insured.
Third, promoting full employment and economic growth.
Currency stability and financial stability help promote full employment and economic
growth. The Report to the 20th CPC National Congress emphasizes that "to build a
modern socialist country in all respects, we must, first and foremost, pursue high-quality
development", and the report proposes to implement an employment-first strategy.
Over the past five years, China's economy has grown at an average annual rate of 5.2
percent in real terms, higher than the world economy's average of around 2.3
percent over the same period. We've maintained relatively full employment, with an
increase of around 13 million urban employees each year.
At the same time, the PBOC has worked proactively to keep the macro economy stable
and promote economic growth, taking full employment as a major task and objective.
Giving play to the role of monetary policy instruments in adjusting both the aggregate
and the structure, we launched structural monetary policy instruments to encourage
financial institutions to support key areas and weak links in the efforts to maintain stable
economic growth and employment based on market principles. At present, the
outstanding balance of these instruments is RMB6.4 trillion, about 15 percent of the
size of the PBOC's balance sheet, which is generally moderate.
We focus on two key areas, namely micro and small businesses (MSBs) and green
development. To support MSBs, we began with policies to stabilize employment. Since
the outbreak of the COVID-19 pandemic in 2020, the PBOC has provided in stages
RMB300 billion, RMB500 billion and RMB10,00 billion of central bank lending and
discounts, at an increasingly more market-oriented interest rate and with an
increasingly wider policy coverage. We have also launched two monetary policy
instruments providing direct support for the real economy, which helped MSBs to get
access to loans. At the end of 2022, the outstanding balance of inclusive MSB
loans was close to RMB24 trillion, with their interest rates dropping from 6.3 percent in
early 2018 to 4.9 percent, and over 56 million MSBs benefited from this initiative. In
order to support green development, in November 2021, the PBOC launched carbon
emission reduction facility (CERF), encouraging financial institutions to lend at
preferential interest rates to market entities operating in key areas of carbon emission
reduction. The financial institutions that received funds under this facility were required
to disclose such information as the emissions reduction and the carbon footprint of
projects financed by such loans. We have engaged independent third-party agencies to
verify their information disclosure. The CERF helped reduce carbon emissions by 100
million tons of carbon dioxide equivalent (tCO2e) in 2022.
Generally speaking, Chinese modernization means new requirements for the
establishment of a modern central banking system. To sum up the tasks involved, the
priority is to achieve currency stability and financial stability. The fulfillment of these two
tasks helps promote full employment and economic growth.
Next step, guided by Xi Jinping Thought on Socialism with Chinese Characteristics for a
New Era, the PBOC will resolutely implement the guidelines of the 20th CPC National
Congress, the Central Economic Work Conference as well as the National People's
Congress (NPC) and the Chinese People's Political Consultative Conference (CPPCC).
We will work hard to build a modern central banking system and maintain currency and
financial stability, so as to promote full employment and economic growth and to
contribute to Chinese modernization.
Thank you!