Abstract: In a recent interview with Chinese media, Huang Yiping talked about such issues as China’s monetary policy in 2021, how to further reduce the financing cost of enterprises, anti-trust policies, the trend of RMB exchange rate and the further opening of China’s financial sector among others.
I. The performance of domestic and international economy this year will be better than last year, but close attention should be paid to the long-term effects of COVID-19 on the economy
Q: The Covid-19 has brought serious impact on the world economy. As the virus resurges across the world recently, what is your assessment on the economic situation this year both domestically and internationally?
Huang Yiping: The economic situation at home and abroad this year will be better than that of last year, but there are still uncertain factors. First, the situation of the pandemic is still unstable, which may affect the pace of economic recovery. The trajectory of recovery of different economies will vary, and while vaccines are already massively used in some countries and regions, it may take time for the virus to be fully contained globally. Second, it deserves attention as to whether the COVID-19 will bring long-term economic effect once it is over, i.e. affecting economic growth for a period in the future.
It is very likely that China's economic growth this year will outperform other economies in the world. The International Monetary Fund (IMF) predicted that China's economy will grow 8.1 percent in 2021. In the fourth quarter of last year, China's GDP grew by 6.5 percent, already back to the pre-pandemic level, and it is expected to continue to grow this year. Based on the low base last year, China’s growth rate this year could be higher. Over the past year, the Chinese government has adopted a series of fiscal, financial and monetary policies to stabilize the economy and enterprises as well as ensure employment. These policies will continue to play their role this year.
Chinese economic policymakers need to pay attention to financial risk. Externally, there is a need to keep a close eye on when the global easing of monetary policy will begin to shift, which could trigger financial risks and market volatility once the US Federal Reserve starts to adjust its monetary policy. Domestically, we should pay attention to whether the pandemic will bring about long-term economic effects, i.e. potential risks such as rising default rate in financial markets and non-performing assets of banks.
II. Monetary policy will likely be fine-tuned but not make sudden turns. There are three ways to lower the financing costs for enterprises.
Q: As the economic recovery accelerates, the special and phased policies during the Covid-19 will be phased out gradually once their mission is completed. The Central Economic Work Conference put forward that China’s macroeconomic policy will maintain continuity, stability and sustainability. In 2021, how will China's monetary policy implement this requirement?
Huang Yiping: Compared with the monetary policies of most central banks, China's monetary policy in 2020 was relatively stable. China did not adopt zero or even negative interest rates, nor did it flood the economy with liquidity. China was one of the few major economies that implemented normal monetary policies. At the same time, China strengthened support to the real economy by measures like reducing the required reserve ratio, introducing refinancing and rediscounting policies, and creating monetary instruments that could directly benefit the real economy, such as one that allows small- and micro-sized enterprises to extend the repayment of principle and interests and one that provides inclusive loans to small- and micro-sized enterprises.
As China’s economy recovers, it is quite likely that its monetary policy will get fine-tuned. With the support of macroeconomic policies, China's economy rebounded quickly last year. If the economy can maintain steady growth this year, then a series of large stimulus policies and measures to stabilize growth during the pandemic may have to be phased out gradually.
It is unlikely that the current policies would make sudden turns. The "continuity, stability and sustainability" mentioned at the Central Economic Work Conference is an important policy guide.
Q: At the end of 2020, the weighted average interest rate of enterprise loans nationwide reached the lowest level since 2015 when the statistics started. This year, there would still be demand from enterprises, especially small and medium-sized enterprises, for cost reduction. Is it possible that the overall financing cost of enterprises can continue to decline?
Huang Yiping: It should be possible that the comprehensive financing cost of enterprises would be steadily reduced this year. In recent years, the financing cost of enterprises overall has shown a downward trend. This year, China will continue to ensure appropriate money supply and provide reasonable and adequate liquidity to support the real economy. With the joint efforts of regulatory authorities and financial institutions, the idea of guiding the financing costs of enterprises to decline gradually while remaining largely stable should be achievable.
There are three market-based ways to reduce the financing cost of enterprises. First, make the prudent monetary policy more flexible, targeted, reasonable and appropriate, and strengthen support for the real economy. Second, strengthen the competition among financial institutions, and reduce the cost of financial services. Third, improve credit risk assessment by taking innovative risk control measures like online big data and offline information. In addition, the fiscal authority can also offer finance discount to reduce the financing cost of enterprises, as evidenced by the special refinancing plan during the pandemic last year.
III. Interest concession such as the 1.5 trillion yuan one is unlikely to last. Market-based risk pricing is the basic condition for the stable operation of the economy.
Q: Last year, the financial system made interest concession worth of 1.5 trillion yuan to the real economy. Will such kind of interest concession to lower financing costs continue this year? What can financial system do to increase its support for the real economy, especially micro-, small- and medium-sized enterprises?
Huang Yiping: Financial institutions were asked to make 1.5 trillion yuan interest concessions to the real economy last year. This should be a temporary measure to cope with the impact of COVID-19 rather than a long-term strategy. After all, for financial institutions, market-based risk pricing mechanism is the basic condition for their sound operation.
There are still many measures that the financial sector can take to increase its support for the real economy. First, make greater use of direct financing to increase credit. Second, maintain a relatively loose monetary policy and ample liquidity to support the real economy. Third, accelerate the opening up of the financial sector and improve the competition environment of the domestic market. The difficulties in increasing financial services for small- and micro-sized enterprises lie in obtaining customers and risk control. The loans of the large number of small-, medium- and micro-sized enterprises and low-income people is of small scale and with high uncertainty and often fails to meet the requirement of traditional credit risk assessment. Now, traditional financial institutions generally assess credit quality using offline information, i.e. obtaining long-term and all-round knowledge about enterprises and entrepreneurs by works of bank loan officers. While such a method can produce effective results, it might be less efficient and more costly, and hence less inclusive.
The long tail effect of technologies such as big data, artificial intelligence, and cloud computing provided by big technology platforms can help ensure large-scale and quick customer acquisition at a low cost; the use of big data for credit risk assessment can solve the problem of risk control, providing a feasible model for promoting financial inclusion. But this has also created new problems. On the one hand, the platforms face a new challenge to ensure the robustness and reliability of their credit risk assessment model; on the other hand, it also puts forward new requirements for regulatory agencies that have to roll out relevant data policy, protect consumer rights and monitor and control financial risks.
IV. The trend of RMB exchange rate fluctuations is affected by domestic and foreign factors; preparing for Fed policy adjustments is a must
Q: In 2020, the exchange rate of the RMB against the US dollar fluctuated widely in both directions, and went out of the inverted "V" trend of first devaluation and then appreciation throughout the year. What are the reasons behind such exchange rate changes? Will this rising trend continue in 2021?
Huang Yiping: The RMB exchange rate depreciated in the first half of last year, and appreciated in the second half of the year. It was mainly due to two reasons: on the one hand, China quickly controlled the spread of the pandemic and saw a strong economic rebound; on the other hand, many countries adopted relatively loose monetary policy, which has also promoted the appreciation of the renminbi to a certain extent.
With the deepening of the market-oriented reform of exchange rate, the RMB exchange rate has become more and more flexible, and the possibility of two-way fluctuations has increased. Prospect for China's economic growth in 2021 is good, so the Renminbi is likely to keep going up. However, many factors can affect the exchange rate. For example, the performance of the European and American economies or their quantitative easing adjustments may put the renminbi under pressure to depreciate. Therefore, predicting the exchange rate trend requires comprehensive consideration of various factors, and simple linear extrapolation is not advisable.
In the United States, President Biden has taken very effective measures to have the public vaccinated and control the epidemic. In addition, he has proposed a set of fiscal stimulus policies. If these policies are implemented quickly as expected, the US economy may recover soon. The inflation rate will also rise, so we should not rule out the possibility that the Fed will begin to tighten its policy.
Currently speaking, the Fed is unlikely to adjust its monetary policy significantly this year. But China should take precautions and preventive measures from now on. Once the Fed starts to adjust its policy, China is likely to face capital outflows, rising interest rates and currency devaluation again. Now that you know this will happen one day, it’s good to make some policy and psychological preparations from now on.
Q: Under the current situation, how to steadily boost the internationalization of the RMB?
Huang Yiping: The 14th Five-Year Plan proposes that China should steadily promote RMB internationalization. On the one hand, China must use the renminbi for pricing and settlement in foreign trade and investment more often; on the other hand, the country must promote the opening of the financial market and strengthen the function of the renminbi as an international investment tool.
In the past few years, China has accelerated its pace to open up the financial industry. But the opening of financial markets was more of channel-style opening. In the future, it should gradually shift to comprehensive and integrated opening. International investors who are optimistic about RMB assets need to carry out asset allocation of multiple product portfolios and be able to enter and exit flexibly, so that they can truly make RMB assets an important part of their investment portfolio.
It should be noted that there are still some discrepancies in rules, systems, and regulatory requirements between China's capital market and the international one. If this problem cannot be resolved, even if the door is open, investors will still find it hard to enter and exit China’s market. Therefore, China’s capital market should adopt rules and regulations in line with international ones, so as to promote the opening of the financial market and internationalization of the RMB.
V. Capital account convertibility and RMB internationalization may be key breakthrough areas for financial opening during the 14th Five-Year Plan period
Q: How to evaluate the effectiveness of financial opening in the past year?
Huang Yiping: The opening of the financial industry is an inevitable option for building a new development pattern. The opening up of the financial industry not only brought in institutions, businesses, and products, increased the supply of financial elements, but also improved institutional rules. This is conducive to improving the efficiency and ability of financial services to serve the real economy and boosting the high-quality development of the Chinese economy.
Since 2018, China has accelerated its pace of financial opening up, and introduced more than 50 measures intensively. The results are obvious to all. To further open the financial industry in the future, it is necessary to focus on the three aspects: first, China needs to fully implement the pre-access national treatment and negative list management system, transform its understanding of openness, and promote systematized and institutionalized opening; second, it is necessary to integrate the efforts of promoting financial opening up, the reform of the RMB exchange rate formation mechanism and the internationalization of the RMB; the third is to build a regulatory framework and risk prevention and control system that is compatible with a higher level of openness, improve the professionalism and effectiveness of financial regulation, and make regulatory capabilities better adapted to the level of openness.
Q: How can China further reform and open up its financial industry to serve the new development pattern?
Huang Yiping: The main challenge facing the financial industry is economic growth transformation, while the financial system has not yet fully kept up with the pace of such transformation.
China’s financial system has effectively supported the country’s economic growth in the past few decades and created a Chinese economic miracle. In the past, China’s economy featured a factor input-based growth model, and this financial system has worked well. But now as China’s economy is to transform to an innovation-driven growth model, further financial reforms, opening up, and innovation are needed.
The focus of financial reform is mainly about three aspects: one is to increase the proportion of direct financing and to develop a multi-level capital market; the other is to let the market mechanism play a decisive role in the allocation of financial resources; the third is to reform the regulatory system to prevent any systemic financial crisis.
We still need to take the opening up of the financial industry seriously. The financial opening has boosted domestic competition, and improved financial services; moreover, it brought in better foreign financial products, financial processes and models and better supported domestic economic growth and technological innovation. At present, capital account convertibility and RMB internationalization may be key breakthrough areas for financial opening during the 14th Five-Year Plan period. The two-way floating of the RMB exchange rate has been greatly improved, and it may move towards managed clean floating in the near future.
China should pay more attention to risks while pressing ahead with financial opening-up. The global economy will remain unstable in the short run, while major central banks around the world could significantly adjust their monetary policies in the next few years. Against this backdrop, it’s critical to maintain financial stability amid opening-up.
Q: How to press ahead with capital account convertibility at the correct timing?
Huang Yiping: It was generally believed that it’s better to step up opening-up when the economy and the financial sector are doing well with stable market conditions and investor confidence. But my perspective on that has changed over the past decade. It’s true that opening-up against good economic and financial backgrounds will attract capital inflows, pushing up the value of the currency and asset prices, and prospering the economy. But this process will inevitably lead to asset overvaluation and accumulation of risks, which, once accompanied by capital backflow, could easily trigger financial crises.
Many of the financial crises in developing countries were a result of large-scale capital withdrawal that overwhelmed the financial market. Some of the experts from international organizations now tend to believe that it’s better to open up the capital account when the economy is not doing that well; and if we do that, we have to keep a close eye on capital outflow and manage related risks.
I now believe that there is no best timing for capital account opening. The key is not the timing, but the prudence with opening-up policies. After the capital account is opened up, some of the short-term cross-border capital flow may do harm to the economy, so it’s not advisable to open up capital inflow and outflow at the same time; it’s better to continue to restrict capital outflow for some time. We should take macro-prudential opening-up policies and properly contain excessive flows of short-term capitals.
If policymakers decide to press ahead with capital account opening-up when the macro-economy is not doing perfectly well, they will put in place precautionary measures out of concern for capital outflow and associated risks, which could cushion the blows of market volatilities. Of course, capital account opening should be based on institutional reforms and a mature, stable market adjustment mechanism.
VI. Building a sound green financial system to enable China’s carbon reduction goals
Q: The importance of China’s 2030/60 carbon reduction goals was stressed at the Central Economic Work Conference. How can the financial sector better support China’s green development?
Huang Yiping: Supporting the strategic goal to peak carbon reduction in 2030 and achieve carbon neutrality in 2060 is one of the priorities for the financial sector in 2021 and beyond. The financial sector has a big role to play in accumulating funds and investments necessary to boost the development of low energy technologies and facilities with low energy consumption and emission. It can direct more funds toward environmentally-friendly industries and projects, which will be important for the structural adjustment of the entire economy.
To achieve the 2030/60 goals, the real economy must go green, and the financial sector has to step up its transformation to meet the real economy’s increasing demand for green investments and financing. This will provide a great opportunity for financial institutions to boost their green finance business.
Going forward, it’s essential to plan ahead and devise proper green finance policies to give full play to the role of finance in resource allocation, risk management and price discovery in support of green development, in order to build a sound green financial system, realize the goal of carbon reduction, and support the structural optimization of the Chinese economy.
VII. Anti-monopoly efforts should focus on regulating the behaviors of digital platforms, and China should roll out a policy package on data protection to safeguard consumer interests
Q: Anti-monopoly has become a focus of social attention recently, which could affect the future development of fintech. How to fight against monopolies of digital platforms and stem rampant capital expansion?
Huang Yiping: Fintech platforms usually have a long tail. Once they are established, almost no marginal cost is incurred, and so they could attract a huge number of customers. The more customers they have, the more data they accumulate, and the better, more comprehensive service they can provide. That makes these platforms highly concentrated, which is actually a natural consequence of their technological characteristics.
But the implications of this concentration could be mixed for consumers and regulators. It can produce economic benefits for the platforms, which, if shared with consumers, would be good for all; but it would be problematic if the platforms reap the benefits alone. The priority for regulators is to make sure the platforms behave properly and maintain open competition and fair transactions so as to protect consumer interests.
Therefore, while paying attention to the market shares of different digital platforms, regulators should attach greater importance to ensuring that the market remains “contestable”. As long as new platforms can enter the market and exert competition pressure, it would not be worrying even if several platforms have a bigger share of the market in the short term. This is different from the case in the traditional economy. However, if leading platforms attempt to block the entry of new competitors, regulators will have to bring them under control.
More importantly, regulators need to produce a code of conduct regarding data collection and analysis by digital platforms. Artificial intelligence (AI) and machine learning represent the future trend of the digital economy, which means that big platforms with massive data will enjoy huge advantage over new entrants, stemming competition and leading to a “winner-takes-it-all” picture eventually.
The pressing task at the moment is to produce a comprehensive policy package on data protection that covers various aspects including ownership identification, data standardization, management of open data, and data transaction and pricing, among others. This is critical to maintaining a contestable market, regulating platform behaviors, protecting consumer interests, and giving full play to data as a production factor.
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