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Sidney Leng

Xie Yu

China has achieved initial victory in containing debt risks – a major threat to the world’s second biggest economy – and has entered a stage of “stabilising the leverage ratio”, the outgoing central bank governor said on Friday.
At a briefing on the sidelines of the National People’s Congress in Beijing, Zhou Xiaochuan, who has headed the People’s Bank of China for the past 15 years, also tried to reassure investors that China would continue to free up its capital account.
He said Beijing could allow mainland investors to buy Hong Kong bonds “at any time” if there was demand. They are barred from doing so at present, but investors in Hong Kong can buy bonds in the mainland market.
“I think that there is probably more that the government can do ... to better connect with global capital markets,” Zhou said.
“China is pushing ahead with convertibility in a steady and gradual manner,” he said. “There are some restrictions, and these restrictions will be removed gradually.”
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Iris Pang, an economist with ING, said as the face of financial reform in China, Zhou was using his last days in the job to promote modernised, market-based governance.
But it is an open question whether Zhou’s liberal ideas will be followed amid fears the country is heading down an authoritarian path, with President Xi Jinping set to secure the right to rule indefinitely under a proposed change to the constitution.
“Zhou has been consistent throughout his career in pushing forward reform – to liberalise the interest and exchange rates, and free convertibility of yuan. But when he retires, he’ll leave big shoes to fill when it comes to further liberalisation of the market, and risk prevention will be crucial,” Pang said.
In terms of defusing the domestic debt bomb, Zhou said the worst time had passed.
“China has entered a period of stabilising leverage or gradually reducing leverage,” said Zhou, 70, who is due to retire in the coming days. “This trend is clear.”
That contrasts with his reading in October, when he warned against complacency and the dangers of a “Minsky moment”, a term coined by US economist Hyman Minsky to describe a sudden collapse of asset prices after long periods of prosperity or growth.
Zhou cited the fact that China’s money supply growth rate was now below the nominal GDP growth rate to indicate that Beijing had brought the growth of debt under control, and that its efforts to control risks were paying off.
China’s broad money supply, or M2, rose 8.8 per cent at the end of February from a year earlier, up from 8.6 per cent at the end of January. The nominal value of GDP rose 11.2 per cent to 82.7 trillion yuan (US$13.05 trillion) in 2017, from 74.4 trillion yuan in 2016.
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While outstanding bank loans have continued to rise, Zhou said that was partly because China’s crackdown on shadow banking had revealed debts on the balance sheets of banks.
“You can’t use just one indicator to claim that, look, China is still adding leverage,” he said.
Chinese banks extended 839.3 billion yuan in net new yuan loans in February, the central bank said on Friday, a sharp drop from January’s 2.9 trillion yuan.
At the briefing, asked whether China would follow the US Federal Reserve in raising interest rates, Zhou’s deputy Yi Gang said the decision would be based on the domestic economic situation.
Yi said the “actual interest rate” was stable and in line with economic fundamentals.
Zhou, who played a key role in securing nominal international reserve currency status for the yuan from the International Monetary Fund, said China could be “bolder” in opening up its financial sector as the country had entered a “new cycle” of growth. The IMF included the yuan in its basket of special drawing rights currencies in 2016, alongside the US dollar, euro, yen and the pound.
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After a period of draconian control over capital outflows in the past two years, Beijing is starting to loosen its grip. It is discussing a new stock connect programme with London that would allow investors from the two sides to make direct transactions. The government is also working on the details of a plan to allow Chinese tech firms listed in the US to “return” to the domestic stock market.
Zhou said it would not be difficult to open the “southbound” channel of the bond connect scheme with Hong Kong, but he did not say when it might happen.
The link was launched in the middle of last year and allows eligible institutional investors in Hong Kong and overseas to buy and sell onshore bonds without a quota through what is termed “northbound” trade. The Shanghai and Shenzhen stock markets also have two-way connects with the Hong Kong bourse.
Hong Kong dollar falls further with monetary authority poised to intervene to prop up currency
Meanwhile, Zhou said Beijing would not interfere with Hong Kong’s management of its currency and peg to the US dollar. The Hong Kong dollar has weakened to its lowest level in 30 years, edging towards the 7.85 lower limit of a narrow trading band which the city’s de facto central bank, the Hong Kong Monetary Authority, is obliged to maintain. A currency peg against the greenback since October 1983 has kept the Hong Kong dollar relatively stable. But that stability has recently been challenged as investors sell Hong Kong dollars ahead of a meeting later this month of the US Federal Reserve.
“We won’t make any policy recommendations to Hong Kong regarding Hong Kong’s fiscal and monetary policy,” Zhou said. But he added that the recent Hong Kong dollar weakness was “within expectations” and said Beijing would “coordinate” with Hong Kong if necessary.
The Chinese government is sitting on US$3.1 trillion of foreign exchange reserves, the world’s largest forex stockpile. In February, the foreign exchange reserves fell for first time in 13 months, but Zhou said that was mainly due to fluctuations in the US dollar value.
Additional reporting by Maggie Zhang


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Outgoing central bank governor Zhou Xiaochuan at the press briefing in Beijing on Friday. Photo: Simon Song

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