Central Bank Governor Yi Gang: Shanghai can take the lead in trialing aspects such as RMB convertibility

On June 18, the 12th Lujiazui Forum opened in Shanghai. Yi Gang, governor of the People's Bank of China, said in his speech that China's current economic fundamentals are good, monetary policy is still in the normal range, and the interest rate of the RMB is the lowest among all developing countries, but it still maintains a high deficit against major convertible currencies, so RMB assets are very attractive to global asset allocation.

Shanghai is becoming an open RMB asset allocation center

Yi Gang said that Shanghai is becoming an open RMB asset allocation center. When global first-class investors invest in RMB assets, they will first think of Shanghai. Global institutional investors can easily carry out cross-border investment and financing activities in Shanghai, especially at present, China's economic fundamentals are good, monetary policy is still in the normal range, and the RMB interest rate is the lowest among all developing countries, but it still maintains a high interest rate spread against major convertible currencies, so RMB assets are very attractive for global asset allocation. At the same time, Shanghai is becoming a risk management center for RMB financial assets. Once domestic and foreign investors invest in RMB assets, they must carry out continuous risk diversification and management.

Shanghai can take the lead in trialing aspects such as the free convertibility of RMB

Yi Gang said that Shanghai has become the best experimental field for innovative financial operation rules and standards. Shanghai can also take the lead in building an international financial center in terms of RMB convertibility and capital account convertibility. As long as it meets the requirements of anti-money laundering, anti-terrorist financing and anti-tax avoidance supervision, funds required for normal trade and investment can flow in and out freely.

New loans for the whole year are expected to be nearly 20 trillion yuan

Yi Gang said that looking ahead to the second half of the year, monetary policy will continue to maintain a reasonable level of liquidity, which is expected to drive an increase of nearly 20 trillion yuan in RMB loans for the whole year, and the increase in social financing scale will exceed 30 trillion yuan.

Both RRR cuts and re-lending are expansionary monetary policies of the central bank.

Yi Gang said that the central bank's reduction in reserve requirement ratio and increase in re-lending are both expansionary monetary policies, but reflected in the central bank's balance sheet, the former is shrinking the balance sheet, while the latter is expanding the balance sheet. In recent years, the amount of expansion and shrinkage of the central bank's balance sheet has been roughly the same, so the size of the central bank's balance sheet has basically remained stable at around 36 trillion yuan in recent years. This is different from the mechanism of the substantial expansion of the balance sheets of the central banks of major economies in the world, but the balance sheets of my country's commercial banks have continued to expand reasonably, and loans have maintained a relatively high growth, reflecting the continuous improvement in the efficiency of monetary policy transmission and the good operation of the market mechanism.

Financial policies should focus on sequelae during epidemic response

Yi Gang said that under the impact of the epidemic, banks' non-performing loans will increase, so increasing the disposal of non-performing loans is an important measure to enhance the sustainability of banks' support for the real economy, and it is also a contribution of the financial sector to the real economy by bearing the costs of the real economy. The financial support policy during the epidemic response is phased, and attention should be paid to the policy design to ensure incentive integration, prevent moral risks, pay attention to the sequelae of the policy, keep the total amount moderate, and consider the timely withdrawal of policy tools in advance.

The following is the full text of the speech by Yi Gang, Governor of the People's Bank of China

Yi Gang: Ladies and gentlemen, good morning! Vice Premier Liu He's speech just now is very important and has profound guiding significance for our financial work. When General Secretary Xi Jinping visited Shanghai in November 2019, he pointed out that Shanghai should strengthen its global resource allocation function and actively allocate global capital, information, technology, talents, goods and other factor resources, which pointed out the direction for the construction of Shanghai International Financial Center. I fully agree with Secretary Li Qiang's remarks on accelerating the construction of Shanghai International Financial Center in his speech just now.

At the previous Lujiazui Forum, I proposed that Shanghai International Financial Center should focus on building five centers. Now I will continue to discuss these five centers with you. First of all, Shanghai is becoming an open RMB asset allocation center. When global first-class investors invest in RMB assets, they will first think of Shanghai. Global institutional investors can easily carry out cross-border investment and financing activities in Shanghai, especially at present, China's economic fundamentals are good, monetary policy is still in the normal range, and the RMB interest rate is the lowest among all developing countries, but it still maintains a high interest rate spread with major convertible currencies, so RMB assets are very attractive for global asset allocation.

Second, Shanghai is becoming a risk management center for RMB financial assets. Domestic and foreign investors must conduct continuous risk diversification and management once they invest in RMB assets. In Shanghai, various elements of risk management are gradually being improved:

First, in terms of pricing, all types of RMB assets can achieve continuous pricing.

Second, the RMB financial market has sufficient liquidity in transactions, with good depth and breadth, and various markets can buy and sell at any time.

Third, in terms of risk hedging, advanced management tools such as financial futures, commodity futures, interest rates, exchange rates, and derivatives are already available, providing the possibility for efficient risk hedging. In terms of information disclosure, the transparency of information disclosure and stricter regulatory requirements have been continuously improved in recent years, continuously enhancing investors' confidence in RMB assets, so that investors can manage and diversify risks well.

Third, Shanghai is becoming a center of financial opening. To attract first-class institutions and talents, opening is a necessary condition. In recent years, Shanghai has accelerated its pace of opening up to the outside world, and a number of internationally renowned financial institutions have settled in Shanghai, which has significantly enhanced the attraction of the world's top financial talents. At the same time, financial supervision capabilities must also be adapted to the degree of financial opening. Only when financial security is maintained in financial opening can it be truly secure.

Fourth, Shanghai is becoming a demonstration center for high-quality business environment. A market-oriented, rule-of-law and internationalized business environment is gradually taking shape in Shanghai. Professional institutions such as financial courts and financial arbitration have been established one after another. Shanghai has become the best experimental field for innovative financial operation rules and standards. In building an international financial center, Shanghai can also take the lead in the free convertibility of RMB and capital account convertibility. As long as it meets the regulatory requirements of anti-money laundering, anti-terrorist financing and anti-tax avoidance, funds required for normal trade and investment can flow in and out freely.

Fifth, Shanghai is becoming a financial technology center. Shanghai's development into an international financial center is inseparable from the support of financial technology. At present, Shanghai is accelerating the construction of a financial technology center and exploring the extensive application of new technologies such as blockchain, artificial intelligence, big data, and cloud computing in the financial field.

Regarding the progress of Shanghai's construction of an international financial center, the Shanghai Municipal Financial Work Bureau recently conducted a very good expert assessment in conjunction with two universities. I have also carefully read the report and the assessment is relatively objective. Now I would like to take this opportunity to briefly introduce the People's Bank of China's implementation of a more moderate and flexible prudent monetary policy this year, and the implementation of the requirements of the government work report to do its utmost to protect market entities in the fight against the epidemic.

First, we have expanded the aggregate supply through quantitative monetary policy tools, focusing on solving the problem of financing difficulties. In the first half of the year, we have launched a series of strong support measures from the perspective of monetary policy, including three cuts in the reserve requirement ratio, an increase of 1.8 trillion yuan in the re-loan and re-discount quota, the introduction of a small business credit loan support plan, and the implementation of a phased extension of the principal and interest payment policy for small, medium and micro enterprises. The above policy measures have achieved good results. In May, the growth rates of the stock of the broad money M2 balance and the scale of social financing were 11.1% and 12.5% ​​respectively, both significantly higher than last year. The stock market, bond market, foreign exchange market and RMB exchange rate are generally stable, and my country's major macroeconomic indicators have shown good signs of recovery since the second quarter. Looking ahead to the second half of the year, monetary policy will continue to maintain a reasonable abundance of liquidity, which is expected to drive an increase of nearly 20 trillion yuan in RMB loans throughout the year, and the increase in the scale of social financing will exceed 30 trillion yuan.

Second, through interest rate liberalization reform, we have guided the continuous decline of market interest rates, promoted the financial sector to make reasonable concessions to enterprises, and worked hard to alleviate the problem of expensive financing. Since the beginning of this year, the financial sector has made concessions to enterprises in three main ways: first, by lowering interest rates, second, by promoting concessions through direct monetary policy tools, and third, by reducing bank fees. It is estimated that the financial system will make concessions of 1.5 trillion yuan to enterprises this year through the above three aspects.

Third, we will solve the sustainable problem of financial support for the real economy by increasing the write-off and disposal of bank non-performing loans. In the context of financial development, we must solve the sustainable problem. Under the impact of the epidemic, bank non-performing loans will increase. Therefore, increasing the disposal of non-performing loans is an important measure to enhance the sustainability of bank support for the real economy, and it is also a contribution to the real economy by the financial sector bearing the costs of the real economy. We believe that the financial support policy during the epidemic response is phased, and we must pay attention to the policy design to encourage integration, prevent moral risks, pay attention to the sequelae of the policy, keep the total amount moderate, and consider the timely withdrawal of policy tools in advance.

Fourth, we have achieved effective monetary and credit growth while maintaining the basic stability of the central bank's balance sheet. Since 2018, the People's Bank of China has cut the reserve requirement ratio ten times, releasing about 8 trillion yuan of liquidity, and the average statutory reserve ratio has dropped from 15% to the current 9%. After the statutory reserve ratio dropped, the money that commercial banks can use independently increased accordingly, and the money multiplier also increased. The process of lowering the reserve requirement ratio is reflected in the shrinking of the central bank's balance sheet on the one hand, and the monetary expansion effect formed by commercial banks through issuing more loans on the other hand. At the same time, the central bank has expanded its balance sheet accordingly by increasing monetary policy tools such as re-loans and re-discounts. Therefore, the central bank's reduction of the reserve requirement ratio and the increase in re-loans are both expansionary monetary policies, but reflected in the central bank's balance sheet, the former is a shrinking balance sheet, and the latter is an expansion of the balance sheet.

In recent years, the amount of expansion and contraction of the balance sheet of the People's Bank of my country has been roughly the same, so the size of the balance sheet of the central bank has basically remained stable at around 36 trillion yuan in recent years. This is different from the mechanism of the substantial expansion of the balance sheets of the central banks of major economies in the world. However, the balance sheets of my country's commercial banks have continued to expand reasonably, and loans have maintained a high growth rate, reflecting the continuous improvement of the efficiency of monetary policy transmission and the good operation of the market mechanism. That's all I have to say. Thank you.