Bloomberg News

PBOC’s Zhou Says ‘Too Early’ to Decide How to Aid Europe

September 25, 2011

(Updates with Zhou’s comments in 11th paragraph.)

Sept. 26 (Bloomberg) -- It’s “too early” to determine how emerging economies can further help the euro area overcome its sovereign debt crisis because reforms are still under way, China’s central bank Governor Zhou Xiaochuan said.

“We need to first see if euro-zone countries can implement their July 21 decision,” Zhou told reporters at the International Monetary Fund in Washington on Sept. 24, referring to a pledge by European leaders to expand the powers of a regional rescue fund. He doesn’t expect Greece will default on its debt and anticipates Europe will be able to overcome its crisis through reform, he told reporters.

Group of 20 finance chiefs last week pledged coordinated efforts to tackle rising risks as Greece teeters on the brink of default and stocks around the world plunged. Attention has focused on the potential for emerging economies to aid Europe as Japan and the U.S. grapple with their own expanding debt burdens and struggling growth.

“Some are studying and proposing to increase the size of the EFSF,” Zhou said, referring to the European Financial Stability Facility. “That needs to be done by the European countries.”

Chinese central bank Deputy Governor Yi Gang said last week that the “real solution” to Europe’s woes must come from within the region, while noting that the world’s second largest economy can help Europe “at the margin.” Addressing whether China Investment Corp. will buy euro-area bonds, Vice Chairman Gao Xiqing said in a panel the company can’t be a “savior” of others because it must keep a certain level of profitability.

Global Outlook

The comments by Zhou and Yi are in line with remarks by Chinese Premier Wen Jiabao on Sept. 14 calling on developed nations to “first put their own houses in order.” China can best contribute to a global economic recovery by ensuring steady growth at home, Wen said at the World Economic Forum in China’s Dalian city, adding the European Union and U.S. should allow more Chinese investment in return.

Zhou noted uncertainties in the outlooks for global economies, saying “the momentum of world economic recovery has weakened markedly, with downward risks for economic operations on the rise, which urgently calls for global nations to step up coordination,” according to a statement posted on the central bank’s website yesterday. He said developed nations should set up “medium-term adjustment strategies” to boost market confidence, while emerging and developing countries should continue restructuring their economies.

Chinese Inflation

On the domestic economy, Zhou said the People’s Bank of China has no “immediate” way to control inflation because it takes time for monetary policy to affect prices.

“High inflation remains the top concern in China,” Zhou said in a statement to the IMF meeting. “We need to consider the time-lag effect. There’s no immediate way to bring inflation down,” he said when asked about further measures to slow price gains. China’s consumer prices rose 6.2 percent from a year earlier in August following a 6.5 percent advance in July that was the biggest since June 2008.

Zhou said China’s economic growth momentum “remains relatively strong, but faces challenges such as relatively fast rises in consumer prices and relatively large amount of capital inflows in the short term”, according to a statement posted on the central bank’s website yesterday.

China won’t change the “overall policy tone,” and will take steps that ensure a “soft-landing” of the economy, Zhou was quoted as saying by the China Business News in an interview today. Policy makers will stay alert for any unexpected or severe problems in the world economy, he said.

Local Government Finances

On Chinese local governments’ finances, Zhou told the Shanghai-based newspaper the nation’s overall debt ratio isn’t high and that while some projects backed by local authorities may have “micro risks,” there won’t be “systemic” problems.

China will continue to increase the flexibility of the yuan, Zhou said in the PBOC’s statement yesterday. Markets will determine whether the Chinese currency will be included in the IMF’s Special Drawing Rights system, Zhou said.

As the flexibility of the yuan increases in the coming five years, China will have more market-determined interest rates and will further open up its capital account, Li Daokui, a PBOC academic adviser, said at a forum in Washington yesterday. If reforms go on smoothly, “the renminbi will be fully convertible in five years,” he said, referring to the Chinese currency.

By comparison, Zhou said in London earlier this month that there’s no “defined timetable” for making the yuan convertible and that it will be a gradual process.

--Belinda Cao, Aki Ito, Victoria Ruan, with assistance from Li Yanping in Beijing. Editors: Ken McCallum, Brendan Murray

To contact Bloomberg News staff for this story: Belinda Cao in Beijing at lcao4@bloomberg.net; Aki Ito in Tokyo at aito16@bloomberg.net; Victoria Ruan in Beijing at vruan1@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net


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