Yi Sees ‘Bold’ Yuan Reform With Gradual Rate LiberalizationYe Xie
China is pushing forward on exchange-rate reforms in a “bold” fashion, while adopting a more gradual approach toward loosening controls over interest rates and capital markets, according to People’s Bank of China Deputy Governor Yi Gang.
While China should advance reforms on all three fronts, it is proceeding at different speeds to maintain financial stability, Yi said at a panel hosted by Johns Hopkins University’s School of Advanced International Studies in Washington.
“You can push all three simultaneously, keeping in mind the relationship among the three and make your program feasible and efficient,” Yi said. “In my mind, there’s a sequence. You have to, in a bold fashion, liberalize the exchange rate and make the exchange rate much more flexible.
‘‘You can do some cautious, step-by-step interest rate liberalization, at the same time you can do some gradual capital account convertibility. You cannot open the capital account overnight.’’
Yi laid out the framework for China’s financial reforms as the government pledges to undertake the most sweeping economic overhaul in two decades amid the slowest growth since 1990. Beijing unveiled a plan today to allow overseas investors to buy mainland shares through Hong Kong, a further step to reduce capital controls after it widened the trading band for the yuan last month.
Central bank Governor Zhou Xiaochuan said last month that deposit rates will be liberalized within two years, the final step of interest-rate reform. People’s Bank of China removed a limit on the lending rate in 2013.
Yi acknowledged that China doesn’t have the right conditions yet to remove its control on the interest-rate market completely. Local governments, without budget constraints, tend to borrow at will regardless of the level of interest rates.
‘‘Even with very high interest rates, they can still borrow, which means you are not ready for interest-rate liberalization yet,” said Yi. “I borrow the money. Who will pay in the future, I don’t care. They are not responding to the interest rate signal.”
Interest-rate liberalization will also lead to higher borrowing costs, slowing the economy which is already under “downward pressure,” he said.
A government report today showed that China’s exports and imports unexpectedly fell in March. The economy probably grew 7.4 percent last quarter from a year earlier, on track for the slowest annual expansion since 1990, according to analysts surveyed by Bloomberg News in March.
Yi reiterated that policy makers plan to establish a deposit insurance program this year, a “very important infrastructure for continued liberalization of interest rates.”
Commenting on the yuan, Yi said that the recent currency volatility is “normal.”
The yuan, also known as renminbi, lost a record 2.6 percent in the first quarter, after gaining 33 percent since 2005, sparking speculation the central bank engineered the decline to discourage speculators. Last month, the PBOC doubled to 2 percent the range in which the yuan can trade on either side of a daily reference rate.
“My forecast is that in the future, renminbi flexibility will increase and it will float in both ways, not like before, it was always a one-way direction,” Yi said. “In the future, two-way fluctuation will be a normal situation.”
Yi also said policy markers haven’t set a timetable for the full convertibility of the capital account. He warned that a rush to open up the capital market with a fixed exchange-rate regime would lead to a financial “disaster” similar to the Asian financial crisis in the late 1990s.