zhou xiaochuan : china ’ s economic development and external financial cooperation speech by mr zhou xiaochuan, governor of the people ’ s bank of china, at the sino - french financial forum, beijing, 21 september 2006. * * * honorable governor christian noyer, dear guests, ladies and gentleman, good morning. today, we have gathered at the sino - french financial forum sponsored by the people ’ s bank of china jointly with the bank of france. on behalf of the people ’ s bank of china, i would like to extend warm welcome to governor noyer and the french colleagues and express sincere appreciation to the national council for social security fund, china insurance regulatory commission, the industrial and commercial bank of china, china construction bank, china life insurance ( group ) company, as well as the participating experts and academicians for your support. the theme of the forum is “ promoting the sino - french financial cooperation and dialogue ”. let me take this opportunity to share with you my views on china ’ s economic development and external financial cooperation. healthy development of the chinese economy needs international financial cooperation at a higher level. china ’ s gdp grew at 9. 4 percent on average in the past 28 years since reform and open - up, the highest in the world and almost 3 times of the world average. economic development of a country underpins the growth of its financial sector. on the other hand, as the core of modern economy, sound financial development guarantees the steady and fast development of the aggregate economy. to maintain healthy and fast economic development, the chinese government has strengthened macro - economic management, deepened economic restructuring and steadily promoted the reform of state - owned commercial banks and capital market in recent years. following the successful ipo of the china construction bank, bank of china has issued h share and a share respectively in hong kong and shanghai in june and july this year. the icbc is actively preparing for its public offering. as for the capital market, due a mistake a decade ago the institutional shares were not tradable. we have made a big decision to change it and with resource input have already achieved evident progress. meanwhile, we have conducted a series of supplementary reforms including enhancing accounting standards, reforming tax system, improving law and regulations and strengthening policy transparency. to a great extent, this has improved china ’ s investment environment and guaranteed the return on foreign capital. china has made progress in financial opening - up. as of end - june, 71 foreign - funded banks have opened 214

##s the effects of negative nominal interest rates, will offer new insights on this important topic. secondly, we need to improve our understanding of the links between monetary policy, macroprudential policy and financial stability. the financial crisis underlined how an impaired financial system could cause severe economic damage and disrupt the transmission of monetary policy. moreover, following the financial crisis, many central banks have provided with new macroprudential tools that remain largely untested. the question of which should be the role of central banks in 3 / 4 financial crisis prevention or mitigation is still far away from reaching any definite answer. several papers in this conference will deal with this important issue. third, we need to have a better understanding of how monetary policy and other macroeconomic policies are transmitted. by now, it is clear that the standard new keynesian framework, which still shapes our general view of the basic elements of monetary policy, has some relevant shortcomings. for example, recent research has underlined how additional channels related to household and firm heterogeneity may provide a more realistic depiction of how monetary and fiscal policies affects the economy, modifying – or even overturning - some of the prescriptions derived from models with representative agents. this is a line of research linking both empirical and theoretical work that may have consequences for our work as central bankers. your discussions over the next couple of days will help to improve our understanding of some of these complex issues, ranging from the emergence and consequences of bubbles in asset markets, to the role of individual heterogeneity in the transmission of macro policies and in the aggregate incidence of financial frictions. conclusion to conclude, i would like to say that both policymakers and academics face new challenges in our understanding of how central banks should act in order to fulfill our mandates and maximize the welfare of the citizens we work for. meetings such as this conference provide an excellent opportunity to strengthen the links between central bankers and academics. i wish you a very productive meeting and a pleasant stay in madrid, expressing my gratitude for your attendance to this first annual research conference of the banco de espana. thank you very much for your attention. 4 / 4