Yi Gang Vs Bernanke: Guiding The Development Trend Of RMB Exchange Rate

During the spring annual meeting of IMF and the World Bank, Yi Gang, Vice President of the People's Bank of China, and Ben Bernanke, former Chairman of the Federal Reserve at the Brookings Institution in Washington Bernanke) held a dialogue between you and me.

Yi Gang, as the main character, sits between the host and Bernanke. Yi Gang, young Bernanke, 5 years old, is a deputy governor of the central bank and a former chairman of the central bank. Both of them have American education background, and they have a good understanding in their dialogue. Especially on the topic of RMB exchange rate, Yi Gang clarified the rumor that the RMB exchange rate follows the US dollar index to the market, and again conveyed a clear signal that "the central bank hopes to see a stable RMB exchange rate".

　　 No reform and overreaction are risks

Yi Gang conveyed to the outside world the forecast of China's stable economic growth. He pointed out that China's economy is still quite strong from the perspective of electricity consumption, CPI, PPI and other data. Yi Gang expressed confidence in China's economic growth of 6.5% - 7.0% this year.

About 10 hours after making this judgment, the National Bureau of Statistics of China released the latest economic data for the first quarter on April 15. In the first quarter of this year, GDP grew 6.7% year on year, showing a good start.

The International Monetary Fund (IMF), in its World Economic Outlook report released on April 12, also just raised China's economic growth expectations this year and next by 0.2 percentage points, to 6.5% and 6.2%.

The IMF also lowered its global economic growth forecast to 3.3%. Yi Gang said that even if China's economic growth slowed down, China was still above the average growth rate in the past 10 to 20 years, so risks and overreaction should not be exaggerated.

"If you really want to do something, the most difficult thing is still reform." Yi Gang pointed out that "not reforming is a risk, and overreaction is another."

Bernanke remained cautious about the economic outlook. He pointed out that although the world economy is indeed better than in previous years, the overall economic growth rate is still "relatively disappointing" for various reasons. For developed countries, the inflation rate cannot be raised for a long time; For emerging markets, such as China, efforts are being made to cope with lower economic growth, lower commodity prices and a stronger dollar. These factors affect each other.

Bernanke said that he has no "panacea", but countries can pay more attention to the role of aggregate demand and the role of fiscal policy, such as Japan.

　　 Bernanke He also said that the outside world has a misunderstanding about structural reform. People always say that only developing countries like China need structural reform, but in fact, structural reform is needed in countries with insufficient demand.

　　 Active fiscal policy promotes structural reform

Bernanke pointed out that the potential contradiction may lie between avoiding currency depreciation and quantitative easing.

"My suggestion is to focus more on fiscal policy - fiscal policy does not have as many negative effects as monetary policy - to stimulate domestic demand is consistent with the goal of reform." Bernanke said that to achieve consumption led economic growth, it is necessary to strengthen social security and increase disposable income (through fiscal policy), Promote the transfer of labor from manufacturing to service industry.

Zhou Xiaochuan, governor of the People's Bank of China, also said in February this year that since the global financial crisis, many countries have relied excessively on monetary policy because of their small fiscal policy space and high debt ratio in the past.

Yi Gang said that this year China's fiscal deficit rate will rise to 3% of GDP, equivalent to more than 2 trillion yuan, compared with 2.3% last year. Therefore, in China, a proactive fiscal policy is very important.

Yi Gang pointed out that China's structural reform "is happening now", and consumption has contributed 66%, which is two-thirds of the economic growth; The manufacturing industry was the largest before, and the service industry accounted for 15% of GDP last year; Consumption is relatively stable.

"China is already on this path of transformation," Yi Gang said. "The difficulty is that China's savings rate may be the highest in the world, and this problem needs to be solved."

　　 RMB Three baskets for reference

Yi Gang once again stressed to the outside world that the market is the primary determinant of the RMB exchange rate. China implements a managed floating exchange rate system based on market supply and demand, adjusted by reference to a basket of currencies.

Yi Gang said that the current market volatility has decreased significantly, indicating that China is more successful in transmitting the message of "reference to a basket of currencies for adjustment" to the market. He said that the central bank hopes to see a stable RMB exchange rate, and the authorities will strike a balance between pursuing policies and allowing the market to determine the exchange rate. "We don't want to see serious overestimation," Yi Gang said.

Yi Gang also said that the US dollar still occupies a "very large weight" in the currency basket, but also stressed that the RMB exchange rate is a "reference" currency basket, rather than a peg to it. Therefore, the RMB exchange rate should not be expected to follow the index.

On the issue of "reference basket", an audience later asked why the RMB is not pegged to the CFETS currency basket recently, so that the exchange rate appears, since the RMB is priced according to a basket of currencies depreciation 。

"That's a good question," Yi Gang said with a smile. He explained that a basket of currencies is mainly pegged to three currency baskets, namely, China Foreign Exchange Trading Center (CFETS), Bank for International Settlements (BIS) and Special Drawing Rights (SDR). "We say that we are pricing by reference to a basket of currencies, rather than pegging to a basket of currencies."

Yi Gang stressed that from the perspective of foreign direct investment (FDI), China's foreign direct investment (ODI) and other indicators, the RMB exchange rate is currently in an equilibrium range. He is confident that the RMB exchange rate will remain stable.

He said that in the face of increasing uncertainty and instability in the world economy, Chinese officials will avoid excessive fluctuations in the RMB exchange rate. The excessive fluctuation or overshoot of the RMB exchange rate is not good for China and the world.

When answering the host's question, Bernanke said that the Chinese government has made it clear that the sharp fall of the RMB is not an option and is unlikely to happen. China may be facing the so-called "triple paradox", that is, to achieve independent monetary policy at the same time, it is impossible for free flowing capital and fixed exchange rate.

"But I think they will achieve their goals, especially in terms of capital flows." Bernanke said that reducing or restricting capital flows is difficult to implement, and can instead improve the investment willingness of domestic and foreign investors. The recent opening of the inter-bank bond market to foreign investors is such a measure.

Bernanke also said that in terms of capital outflows, he did not see the scene of the Asian financial crisis in the 1990s.