Policy Talking Points - China's Economy

In an effort to gain a better understanding of global economies and China policies as well as the current state of China financial markets,China Forex spoke to Mu Zhiqian,a consultant to SAFE's Balance of Payments Department. The following is an interview with Mr. Mu conducted by Debra Lodge,managing director Global Markets and head of RMB Business Development,North America,at HSBC.

Q: The UK vote to leave the European Union created turbulence in financial markets around the world. What impact will Brexit have on China's economy?

A: As far as the global economy is concerned,the impact of the Brexit vote has been far less than we had anticipated. I believe,however,that it's still too early to say what the longer term effects will be. Much depends on how the leaders of the UK and the EU address the challenges from the old order and whether they can seize the opportunities of a new one. Neither China nor Britain plays a big role in the investment picture of the other country relative to overall investments. British assets are also only a small part of our own foreign exchange reserves. But we truly hope that China can maintain close and healthy ties with Britain as well as the EU.

Q: The BOJ is debating further monetary easing strategies,while the Fed's next move on policy rates remains unclear. What measures are in place that could help China cope with the uncertainties of monetary policy around the world and possible market volatility?

A: Generally speaking,market practitioners attribute the Federal Reserve's reluctance to push ahead with higher interest rates to the slow economic recovery in the US. I see this cautiousness as a wise policy stance. Everything is in position to respond if needed. All the Fed has to do is pull the trigger at the right moment. The Fed has more than once sent signals of a possible move on interest rates but without actually taking any action. Expectations of a possible rate hike have a bigger effect than any actual move. As to the possible impact on China from the Fed's policies,we should look carefully at what happens when capital shifts to the US from other economies,including China. With this kind of scenario,China will accelerate the development of its financial institutions and boost the efficiency of its financial regulation. It also will strive to put policies in place that are aimed at reducing domestic financial risk.

Q: The better-than-expected GDP growth in the second quarter suggests that the Chinese economy may be stabilizing,though problems with weak fixed asset investment persist. Do you expect to see more monetary easing每such as interest rate cuts or reductions in the bank reserve requirement - over the rest of the year?

A: Yes. The economic data from the second quarter look stable and promising,but that doesn't mean that we can use "one-size-fits-all" solutions for our economic problems. One thing we cannot overlook is the fact that private investment,which accounts for 61.4% of fixed-asset investment,fell 9.2%,according to official data. Monetary policies can be an effective leveraging tool and should be used to stimulate private investment.

Q: As financial reforms progress,we have seen frequent regulatory changes in China. Our clients find some of these changes hard to follow. For instance,there are some new restrictions on corporates converting renminbi into foreign currencies onshore. What mechanisms do you have to communicate with the market before and after such policy changes?

A: It is reasonable to introduce market supervisory measures in certain circumstances. This is particularly true when authorities need to prevent speculative transactions in order to maintain a healthy and orderly market. Commercial banks serve as a bridge between the foreign exchange authorities and the market,and there is certainly more room to boost communication. There is also a need for further training in determining the authenticity of transactions and understanding the background of bank customers.

Q: Pan Gongsheng,the head of SAFE,said in late July that China will step up its monitoring of (illegal) cross-border capital flows. What is China's approach to balancing a desire to open the capital account and concerns over capital outflows?

A: Efforts to open the capital account are proceeding though with an effort to limit risk. There are two main aspects of balancing international payments,namely cross-border capital flows and the the convertibility of the currency against foreign currencies. If the international payments ar