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Governor, People's Bank of China
at the Fifty-Third Meeting of the Interim Committee
of the Board of Governors of the International Monetary System
September 26, 1999, Washington, D.C.
World economic growth and policy selection
The world economy appears to be on the mend following the global slowdown and financial turbulence of the past two years. However, the international community should be aware that there are great uncertainties attached to the sustainability of the recoveries underway and they should be ready to take the necessary actions accordingly.
Economic growth in the United States has been sustained for about 101 months with an average annual rate of 4 percent over the past three years. The current expansion will become the longest on record after World War II if it continues into early next year. It should be noted that this derives mainly from high-tech oriented structural adjustments and the rise in productivity growth. In addition, some crisis related short-term external factors have also contributed to the recent U.S. expansion. These short-term external factors could be reversed in the context of the gradual recovery of the crisis economies. The United States, however, can hardly continue to grow at its previous rate. In this regard, we appreciate the Federal Reserve's action in raising interest rates twice this year to prevent the economy from overheating. China believes that sustained growth and successful adjustment of the U.S. economy is beneficial to global economic growth. Therefore, we hope that the U.S. authorities could take full account of the impact of their economic policies on the world economy and be especially alert to possible shocks in the crisis countries.
The economic recovery in Japan is undoubtedly beneficial to the Asian economy. However, its sustainability remains uncertain. Japanese fiscal policy, therefore, needs to continue to expand to stimulate the economy and provide capital for the restructuring program, and, at the same time, faces the critical task of fiscal consolidation over the medium term. Banking sector reform and corporate restructuring need to be further pursued. The Japanese economy could be sustained if appropriate solutions to the above problems can be found.
The European economic outlook will essentially rely on the successful reduction of the excessively high budgetary expenditure on welfare and the ability to overcome the effects of labor market rigidities. It is important for the euro area economies to strengthen their policy coordination in other areas to consolidate their economic and monetary integration achievements. Although the euro exchange rate has fluctuated to some extent, we believe that the rate will eventually be stabilized in the context of improved economic performance in Europe, and play an important role in the international monetary system.
We are pleased to note that economic performance in Russia and other transitional countries has appeared to show signs of stabilization. However, given their heavy structural reform agendas, it is imperative that these countries continue to take decisive measures to restructure their weak financial and corporate sectors, improve their external financing environment, and strengthen their fiscal positions to stabilize their economies and sustain healthy growth. The external economic environment in many African countries has deteriorated due to the reduction in commodity prices. However, the recent rise in oil prices and the debt reduction proposed by the international community should help these countries improve their economic climate. Africa's economies will hopefully bottom out if they can continue their structural reform efforts.
Economic activity in Asia and Latin America has begun to turn around; the exchange rates of most currencies have stabilized, and different progress has been made in their structural adjustments. However, the structural problems existing in their economies have yet to be resolved. Sustained economic growth in these countries not only relies on an improved external environment, but is also determined by the progress in their structural reform and adjustment efforts.
The East Asian economies have sustained their growth for decades. We believe that their experience and practices should not be denied because of the crisis. In this regard, it is important for them to draw lessons from the crisis, address the weaknesses in their economies, and continue with their reforms so that the Asian economies can sustain a rapid and stable economic growth in the next century.
The imbalances in the economic development of the United States, Japan, and Europe, and, more specifically, the balance of payments imbalances, and international financial market turbulence are the key uncertainties in the world economic outlook. Therefore, we call on the major industrial countries to coordinate their macroeconomic policies and minimize the risks and possible negative impact of their policies on the world economy. We would also like to remind them to be alert to trade protectionism while they try to stimulate their domestic demand, and to further open their markets to the developing countries. At the same time, it is necessary for the industrial countries to increase their financial assistance to developing countries while their fiscal positions are being improved.
The international community should take full account of the risks derived from economic integration and globalization, and the liberalization of trade and capital transactions. More importantly, the developed countries should not solely favor the liberalization of commodities and production factors for their preference while barring the mobilization of production factors which may be favorable to the developing countries. We, therefore, hope the international community will attach sufficient importance to the liberalization and mobilization of labor and technology to ensure the optimum allocation of global resources.Strengthening the international monetary and financial system
The financial crises of the 90s, especially the recent Asian financial crisis, demonstrate that the current international monetary and financial system can no longer accommodate the needs of international economic and financial development, and, therefore, the system needs to be reformed.
However, the operations of the international monetary system and its reform should not be controlled by a few member countries. The voice of the developing countries should not be neglected. They should be more involved in the process, and should not be forced to restructure their economies according to the developed countries' standards. Moreover, more attention should be paid to their capacities and realities-otherwise the stability of world economic development will be harmed. The last two years have proven that if the developed countries could not pay enough attention to the level of economic development in the developing countries and solely call on these countries for opening markets, the developing countries may encounter new crises, which, in turn, will affect the healthy development of the world economy.
The role of international reserve currency played by a few countries' national currency has been a major source of instability in the international monetary system. The fluctuation in exchange rates increases uncertainty in trade and investment and exposure to speculative transactions, and, at the same time, generates different types of derivatives resulting in the popularity of highly leveraged operations. Huge risks abound on the international financial market. The current international financial system cannot solve the balance of payments imbalance, which has repeatedly been the cause of international financial crises.
To solve the problem of an international reserve currency, the international community should consider the additional allocation of SDRs and create conditions to increase their use, and strengthen the Fund's function of providing liquidity to its member countries.
The selection of a country specific exchange rate regime should take account of each country's level of economic development and degree of openness to the outside world, and, at the same time, the appropriate level of macroeconomic policies. Economic theory and practice have proven that under the current international monetary system, a country cannot have an independent monetary policy, stable exchange rate, and achieve capital liberalization at the same time. The selection of an exchange rate regime eventually relies on a compromise of these three objectives. The unsynchronized nature of the economic cycle in the United States, Japan and the euro area, and their relatively independent monetary policies, results in exchange rate fluctuations among the major currencies. Thus, the major industrial countries should shoulder the responsibility in coordinating their policies effectively to establish a new exchange rate mechanism.
Fund surveillance can be effective only in a rational international monetary system. We have noticed that international financial institutions attach great importance to compliance with international standards. We believe that by improving the transparency of operations for all market participants-public and private institutions-efficiency and crisis prevention will be improved, and, therefore, partially correct the market failure. We support the Fund's proposal and have made our effort. However, since transparency was not the major reason for the crises, to excessively stress this issue may divert the necessary attention away from the deep-seated problems which caused the crises. The series of good practices and international standards aimed at improving transparency are not always effective. "The more transparent the better" is not always true. In the industrial countries, transparency practices have been developed over decades-even centuries. It is neither realistic nor fair to require the developing countries to improve their transparency to the same level as the developed countries. Improvements in transparency should be gradually pursued on a voluntary and case-by-case basis. We do not believe there should be any mandatory enforcement in this process. At the same time, the Fund should try to avoid acting as a commercial rating agency and continue its role as a confidential and reliable policy advisor to its member countries.
The private sector should be encouraged to be involved in the prevention and resolution of financial crises, benefiting the stability of the international capital market as well as world economic development. The international community should reach a consensus on the different technical proposals in this respect and promote their implementation. The information disclosure and transparency of private institutions in the international financial market should be increased. The short and long-term interests of debtors and creditors in the debt arrangement negotiations should be balanced. We also urge the major industrial country authorities to provide the necessary conditions, according to market rules, to strengthen the cooperation between debtors and creditors on a voluntary and fair basis.
The Fund has always been at the core of the international monetary system. Its functions are irreplaceable. However, the Fund needs to reflect on its experiences and lessons, improve its efficiency, pursue substantive reform, and continue to enforce cooperation with other international institutions. The Fund is also encouraged to pay more attention to the specific political, economic, and social conditions of member countries in its program design to improve the effectiveness of its policy recommendations.
We are willing to keep an open mind on the reform of the Interim Committee and support the proposal to change its name to "International Monetary and Financial Committee". Full account should be taken of the representativeness and effectiveness in the process of reforming the Interim Committee, so that it can play a more important coordinating role in the discussion of the different proposals related to the reform of international monetary and financial system. Sufficient attention should be paid in the process of this reform to ensure that the representation of the developing countries is enhanced and that their voice is heard.
Capital liberalization and the role of the Fund
During the 1990s large capital flows speeded up integration and globalization. For most developing countries, it has been both an opportunity and a challenge. How to ensure the reasonable allocation of financial resources while avoiding the negative impact of excessive capital flows on the international financial market and local economies becomes a difficult issue on which the international community needs to reflect.
It is our view that although capital control and capital liberalization are two extremes in concept, in practice, however, every country is positioned between the two extremes, i.e., countries with capital control regulations may also allow some capital movements, and countries that demonstrate capital liberalization may also have restrictions on capital movements. We believe that both excessive control over capital movements and excessive capital speculation are harmful. It is well recognized that imposing capital control is either due to market failure, or the government's choice between independent monetary policy and exchange rate stability. Thus, moderate capital control seems to have its own merits in both theory and practice. In this sense, we believe the international community should establish the necessary mechanism and standards to restrain huge and irrational short-term capital flows, and effectively regulate the activities of highly-leveraged financial institutions, hedge funds, and off-shore centers.
Capital liberalization should be phased in cautiously, gradually, and in an orderly manner, subject to the necessary preconditions. Each country should be entitled to decide, according to its own circumstances, whether to open its capital market, and how and when to liberalize its capital market. In the process of promoting capital account convertibility, the Fund should consult with its member countries and help them develop the necessary preconditions for capital liberalization, including the adoption of effective and appropriate macroeconomic policies, and the establishment of a sound financial system-instead of solely accelerating the speed of capital liberalization.
A sound financial system and prudent supervision are the preconditions for capital liberalization. In the wake of the Asian financial crises, the crisis countries have made progress in their painful, but effective, financial restructuring, and all the countries have attached increased importance to prudent financial supervision. We welcome the efforts made by the Fund and the Basel Committee in this respect. In this context, we emphasize that the formulation and implementation of the framework and supervision principles should take account of the interests of developing countries and allow the process to be arranged in a phased manner. The Fund also needs to strengthen its technical assistance in this respect.Fund's role in promoting sustainable growth and poverty reduction
We support the Fund's efforts in strengthening the debt reduction for HIPCs and the poverty relief for low-income countries. However, action should be taken to prevent the possibility that the combination of debt reduction and poverty relief might delay the debt reduction schedule. Poverty relief should be based on each country's economic development.
With regard to the Fund's proposal to increase attention on social sector issues, we believe, for the developing countries, that sustained economic growth is the only way of solving the problems related to poverty, education and health. The Fund should focus its efforts on maintaining the stability of the international monetary system, thus providing a favorable environment for economic development in developing countries. The Fund should be alert to its differences from other international institutions and avoid the unrealistic and over complex nature of its assessment system. The Fund should strengthen ownership of the program and ensure that the member country authorities play a major role in program implementation. It is also worth pointing out that there should not be any conditionalities attached to the programs of developing countries which are either out of line with their realities or difficult to implement in the short term.
Chinese economic growth and reform
In 1998, China successfully weathered the Asian financial crises, overcame many natural disasters, and managed to attain 7.8 percent economic growth. In 1999, the Chinese government has continued its vigorous and active fiscal policy, appropriate monetary policy, and maintained steady economic growth.
In the first half of 1999, GDP increased by 7.6 percent, faster than the same period last year. From January to August, value added industrial production increased by 9.5 percent, fixed asset investment increased by 10.4 percent, social commodity retail sales increased by 6.3 percent, the retail price index decreased by 3 percent, and the consumer price index reduced by 1.7 percent.
China's foreign trade performance continued to improve. From January to August, the total volume of imports and exports reached US$220.8 billion, a 7.3 percent rise. From January to August, exports amounted to US$118.4 billion, among which, exports in July and August increased by 7.5 percent and 17.8 percent, respectively. The total trade surplus for the first eight months reached US$16 billion.
The monetary policy stance is stable. In the first eight months of 1999, M2 increased by 16 percent compared with the same period last year while M1 increased by 14.4 percent. By the end-August 1999, foreign exchange reserves reached US$150.4 billion, an increase of US$5.5 billion from the beginning of the year. The RMB exchange rate remained stable.
The Chinese economy is presently encountering some problems. Foreign trade is still facing difficulties; FDI growth is lower; consumption is sluggish; fixed asset investment has slowed down; and the inflation rate continues to be negative. The tendency is for economic growth to slow down somewhat this year.
To solve these problems, the Chinese government has adopted a series of measures to stimulate investment and consumption, and expand domestic demand. In addition to the issuance of special government bonds for RMB100 billion in 1998, we have issued new government bonds for RMB60 billion to generate fixed asset investment, plus a matched loan, so that total investments could be increased by more than RMB300 billion. To stimulate consumption, we have raised the wages and salaries of government agencies, and subsidies to low-income citizens. We have started to impose an interest tax to increase tax revenue and, at the same time, to crowd out the banking deposit to be invested and spent. Meanwhile, we have also accelerated the social safety net process.
The People's Bank of China (PBC) has made effort to increase the flexibility and credibility of monetary policy. The main objective of these polices is to pull domestic demand up in conjunction with other important policy instruments, such as tax and expenditure policies. In this process, PBC also attaches great importance to mitigating any risks that may arise in the financial system. The major measures include:
At the recently concluded fourth session of the 15th Plenary Committee, the Communist Party passed a Decision on a series of important issues related to the SOE reform. According to the Decision, we will restructure the existing arrangement, redesign the strategy of restructuring, push forward the process of equity restructuring, establish a modern enterprise system, improve the balance sheet, and cushion the enterprises' social burden. In 1999, the performance of SOEs has improved a great deal. In the first eight months of this year, value added industrial production increased by 9.4 percent compared with the same period last year, of which, the industrial production of the enterprises increased by 7.7 percent, a 3.9 percent rise over the same period last year. In the first seven months of this year, the profits generated by industrial enterprises increased by 74 percent over the same period last year, of which, the profits generated by the enterprises increased 2.1 times. By the end of next year, it is expected that most of the large SOEs will stop making a loss, and a modern enterprise system will be established in most large and medium sized SOEs.
We believe the Chinese economy will continue to grow in the context of the deepening reform of the financial sector and corporate restructuring. In 1999, GDP is expected to increase by at least 7 percent, fixed asset investment to increase by 12 percent, social retail sales to increase by 6 percent; taking account of inflation, the real growth rate is expected to be 9 percent. Total exports are expected to be maintained at last year's level. The RMB exchange rate will remain stable.
Hong Kong SAR withstood the challenge stemming from the financial crisis in 1998. In 1999, Hong Kong's housing market has rebounded, banking deposits and exchange reserves have improved, and GDP turned to positive growth in the second quarter. Hong Kong SAR has passed its hard time. It has proven that the policy measures it adopted were appropriate, acting as a safeguard, enabling Hong Kong to successfully weather the external shocks. The central government supports Hong Kong SAR's policies aimed at stabilizing the economy.
This year on December 20, China will resume its sovereign rights over Macau. We will strictly accord to the principle of "one country two systems, highly autonomous" to strengthen the economic coordination among the mainland of China, Hong Kong SAR, and Macau, to promote economic growth.
Great potential exists for China's economic development. We are confident that the Chinese government and its people will overcome every difficulty--including the negative impact arising from the Asian financial crisis-sustain economic growth, and further contribute to global economic growth.