A Talk With China's Top Central Banker
There is a new air of confidence at the People's Bank of China. With the government's three-year-old austerity program paying off, inflation, which hit an annual rate of 21% in 1994, retreated to a 7.7% clip in the first quarter. So People's Bank Governor Dai Xianglong decided on Apr. 30 to cut lending rates, by an average of three-quarters of a percentage point, for the first time since mid-1993. The new base rate for 6-month loans is now around 9.5%. But Dai is hardly looking toward easy money. In his first interview with a major Western publication, the urbane, 51-year-old central banker vowed that credit would remain moderately tight for the next five years.
Analysts say Dai reduced rates to aid money-losing state banks caught between high-yielding deposits and low-interest-rate loans to debt-burdened government-owned enterprises. Indeed, these debts will be a major challenge for Dai, who succeeded Zhu Rongji as governor of the central bank last June.
A Beijing-trained accountant, Dai served as general manager and deputy chairman of the Bank of Communications and vice-governor of the Agricultural Bank of China. Dai met with BUSINESS WEEK editors for an hour in the bank's new marble headquarters in Beijing, where four carved elephants stand guard in the lobby. The elephants, he said, represent stability. His comments:
Q: Is inflation under control, and has the economy achieved a soft landing?
A: We are quite satisfied with the achievements in the fight against inflation. Measures against inflation have not caused any major fluctuations in the national economy, and price levels have been brought down. At the same time, economic growth has been steady. But we have not really reached our aim of a soft landing. Our understanding of soft landing is when price rises are a certain percentage lower than the economic growth. We are now achieving 8% to 9% economic growth annually. We think the price level should be lower than that. We are likely to achieve that next year.
Q: Do you intend to maintain tight money?
A: Over the next five years, our monetary policy direction will be a moderately tightening one. This is very certain. In the shorter run, there could be slight increases or decreases. But the slight easing of credit does not mean we are changing the direction of our monetary policy for the medium term.
Q: What is a healthy growth rate?
A: The guidelines for our Ninth Five Year Plan for economic development make it very clear that the aim of our economic growth is 8%. A lot of provinces have their own economic targets, and quite a number of them are targeting more than 10%. As the central bank governor, I would like to see a steady and stable situation. We anticipate that the investment, both from the domestic market and internationally, will be very strong in China [over the next five years], so economic growth might be higher than the 8% target.
Q: How are you going to handle the nonperforming loans of China's state enterprises?
A: I think about this problem every day. We can continue to lend to those enterprises that can survive in the market. For enterprises without a lot of hope for survival, we will encourage better-performing ones to acquire those making losses. For really insolvent enterprises, we are going to support mergers or bankruptcy. In about five years time, we can solve the problem and make the quality of bank loan assets a lot better.
Q: What banking reforms will we see this year?
A: We're trying to strengthen the autonomy of decision-making of commercial banks. And some banking institutions are downsizing their branch networks and closing down branches that are not making enough profit.
Q: What is your thinking on the convertibility of the renminbi?
A: The convertibility of the renminbi is an aim we're going to achieve by the year 2000.