A Talk with China's Banking Chief


China's top central banker has a worried eye on the slowing global economy these days. Dai Xianglong, governor of the People's Bank of China, says he expects "for sure" the Japanese yen and other Asian currencies will weaken as a result of the slowing U.S. economy and continuing regional sluggishness. But Dai told BusinessWeek Online he won't allow the Chinese currency, the yuan, to depreciate.

In a rare and wide-ranging interview on Mar. 27 with BusinessWeek editors in Beijing, Dai evinced confidence that China could hit its 7% GDP growth target for 2001. Domestic demand, particularly through the heavy fiscal stimulus the government is using to develop the western part of the country, will continue to power the economy, he contends.

Dai says the trading band on China's currency will be gradually widened, although he gives no timetable for convertibility. He also says that with strong continued foreign direct investment (expected to run about $45 billion annually for the next four or five years) and good export performance, he expects China's foreign-exchange reserves to hit $200 billion soon.

At People's Bank of China headquarters, Dai sat down to chat with BusinessWeek Editor-in-Chief Stephen B. Shepard, Asia Regional Editor Mark L. Clifford, and Beijing Bureau Chief Dexter Roberts. Here are edited excerpts from their conversation:

Q: How worried are you about the Chinese economy, given the weakness in the U.S. and Japanese economies and continuing problems in Southeast Asia?

A: The recent slowdown in the U.S. economy is larger than anticipated, and the Japanese economy continues to be sluggish. This has some influence on the Southeast Asian countries. We in China also feel the impact. Thirty percent of our total exports go to the U.S., and almost 20% to Japan.

The slowdown in the U.S. economy and the continued recession in Japan have already begun to affect our exports. Last year, total exports and imports went up by 30% compared with the year before last. We have fixed the [export] growth rate this year at 8%. The difficulty in realizing such an objective is becoming larger.

With the recession going on in Japan there has already been the downward trend in the Japanese currency. I can say for sure the Japanese yen will devalue. This will bring about successive devaluations in Southeast Asian countries. This will add to pressure in maintaining the stability of the yuan.

There are also some upside elements here. As a result of the slowdown in the U.S. economy, I hope international investors might increase their investment in China. The speed of inward investment has gone up, and a lot of projects have been signed. There is a good chance for FDI [foreign direct investment] to increase by $45 billion every year for the next four or five years.

Because of the increase in imports and drop in exports, the trade surplus might drop. But there will be continued inflow on the capital account, so we will maintain a [positive] balance in our balance of payments [BOP] position and foreign exchange will continue to grow.

Although, in terms of trade, our dependence on the world has increased, our strategy is to tap the vast potential in our domestic market -- in particular the rural market -- and we will rely on the development of the [western part of the country] to develop our economy. The Chinese government has prepared itself for such changes in the world market. We have fixed the [GDP growth] projection at 7% [in 2001], rather than 8% [as it was in] the previous year. We have left some room [to] maneuver. The [yuan] exchange rate can stay stable. With prices going up in China, there will be macroeconomic stability.

Q: What did you learn from the 1997 Asian financial crisis that may help you if the countries of Southeast Asia continue to weaken?

A: The most important thing that we have learned in this financial crisis is that it is important for each country to maintain economic and financial stability. It is necessary for a country to manage its macroeconomic situation, including its fiscal situation and price stability, so as to maintain confidence.

At the same time, it is necessary to maintain a step-by-step manner in opening up. For example, adopting an exchange-rate system that fits the situation in our country. There should be some flexibility [in the] exchange rate. Rather than [rigid] stability, there should be sufficient foreign-exchange reserves. More prudence should be adopted in opening up the capital account. There should be strict controls over the debt ratio, in particular the long-term debt.

I think the Southeast Asian countries have learned the lesson in the crisis. These countries have seen their external debt levels declining or staying at the same level, or declining and their foreign exchange reserves going up by large margins. Needless to say, the slowdown in the U.S. economy and the recession in Japan will cause a large damage to them yet again.

In 1997, at least there was a strong U.S. economy. Now, the U.S. economy has been slowing down. But I think these countries have greatly increased their own capability to ward off risks.

The second lesson is that financial and economic globalization has increased capital flows in the whole world, thereby increasing risks for many countries. Countries should strengthen consultation with each other and work to improve the global financial order and give a larger role [to] the International Monetary Fund and the World Bank. More attention should be given to the voices of the Asian countries. Asian countries ought to supervise better the speculative hedge funds.

Q: What plans do you have for widening the trading band for the yuan?

A: In 1994, we adopted a single managed-floating-rate regime. Seven years have passed since then. By and large, the [yuan] has remained stable. At this moment, the fluctuations of the [yuan] exchange rate remains quite small. The reasons for this small fluctuation is our balance of payments position. The size of our external debt is manageable. There is not much short-term external debt. Plus, we have foreign-exchange reserves that are increasing all the time. Over the past five years, the average annual growth rate of the economy has been 8%. The economic fundamentals have produced the [yuan] stability. It is not a man-made stability.

However, the exchange-rate stability will be under greater pressure after we have joined the WTO, when there will be greater changes in our imports and exports and BOP position. Once there is a need, we will enlarge the band for [yuan] exchange-rate fluctuations. But we shall not change the tendency of [yuan] stability. We will not adopt a freely floating exchange rate. So long as the capital account has not been liberalized, we will not adopt a free-floating regime.

Q: Do you foresee a time when the currency will be fully convertible on world markets?

A: The Chinese economy will be further opened up and integrated into the world economy. Ultimately, the [yuan] will become a fully convertible currency. We have liberalized our current account since November, 1996. The capital account has been gradually liberalized. The major item under our control is that we do not allow foreign currency to be changed into [yuan] to invest in our local currency market, especially the equity market. We might adopt some transitional measures later on.

We might take some controllable measures, such as allowing foreign currency to set up an equity market investment fund [as Taiwan has done]. We will take further measures to liberalize after our BOP [surplus] has become even stronger and the size of our stock market grows even larger. However, we think it is difficult to do that in the coming few years. We have never fixed a timetable for full convertibility of the [yuan].

At the moment, China makes up 3.5% of world GDP. Our objective is to double our GDP in 10 years time. I believe that with such great growth in our GDP, our [yuan] will become a convertible currency.

Q: How will exchange-rate stability be affected by WTO accession?

A: Our foreign-exchange reserves are still growing. In the near future, they will grow to $200 billion. As to the stability, the degree of fluctuation, that shall depend on the balance of payment position and the balance between imports and exports. I can say for sure the exchange rate will remain stable now and in the early days of our WTO accession.


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