A talk with Donald Kohn on China's financial reforms
0 Comment(s)
Print
E-mail People's Daily, March 16, 2015
|
|
|
Donald Kohn is a noted American economist and former vice chairman of the Federal Reserve. [File photo] |
The parliamentary sessions of China, the nation's most important annual political event, concluded on March 15, 2015. China's new growth story, China's New Silk Road initiative and deepening China's financial reforms are among the most hotly discussed topics both in and out of China during the 10-day political event.
Donald Kohn is a noted American economist and former vice chairman of the Federal Reserve. He talked with Li Zhenyu, producer and host of the Elite Talk show from People's Daily Online Business Channel, during the parliamentary sessions of China. They talked about China's new growth story vs. the American growth story, the China-U.S. economic competition vs. cooperation, China's financial reforms and other hotly discussed topics.
Below is the transcript:
Host: Chinese Premier Li Keqiang made the announcement at the start of the National People's Congress that China's growth target for this year is "around 7 percent", the lowest in more than two decades. But it's still almost three times the growth rate of the United States. And according to the IMF, China has overtaken the United States as the world's largest economy. Do you think it's overhyped?
Kohn: I think China has a lot more people than the U.S. I hope that its development proceeds and the people become increasingly better off and have higher standards of living. So I expect the size of the Chinese economy to overtake the U.S. economy at some point. I don't think it's a big deal. What I would expect from is a country that is five times as large as the U.S. in terms of population, so I don't see this as a major issue. I mean it's indicative of the fact that China is big, bigger than the United States in terms of population, and its standards of living are rising. That's fine.
Host: So you do think it's an overstatement to say that China has surpassed the United States economically.
Kohn: Yes. It's good that China's standards of living are rising. China has a lot more people. And at some point, the total size of China's economy will be bigger than the total size of the U.S. economy. And that's not a big deal.
Host: So why do you think some Americans are so keen on hyping the idea? Do you think it has something to do with the "China threat theory"?
Kohn: China what?
Host: The China threat theory, you know, seeing China as a threat to the U.S. But there's a view, which says, China is just an imaginary enemy for the U.S. Taking China as an imaginary enemy can enhance crisis awareness. That's why some Americans deliberately keep on exaggerating China's economic power and go out of their way to hype it. Do you agree with this statement?
Kohn: Yes. I mean you are asking a foreign policy question. It's not my area of expertise. I am an economist. I think I can answer your economic questions.
Host: Alright, this is more of an economic question. It's about China's New Silk Road initiative, which is the centerpiece of China's economic diplomacy. How do you see China's New Silk Road strategy and its relations with the United States' "pivot to Asia" policy?
Kohn: I don't know enough about China's New Silk Road initiative.
Host: OK. You know, some people see China's ever-growing economic clout in Asia as a challenge to U.S. dominance in the region. Do you think it's a zero-sum game when it comes to the economic competition between the United States and China in Asia? Or it could be a win-win game if handled properly?
Kohn: I think it could be a win-win game if handled properly.
Host: OK. Thanks for your patience. I know it's still somewhat of a foreign policy question. But the following will be purely economic questions. We just talked about the economic competition. Now let's talk about the cooperation, the China-U.S. financial cooperation more specifically.
You know, financial cooperation is an important part of China-U.S. cooperation. The two sides have agreed to further strengthen financial cooperation, including collaboration in the areas of shadow banking, OTC derivatives, cross-border audit oversight and accounting standards. As an American financial expert, how do you see the potential of the financial cooperation between the world's two largest economies?
Kohn: I think it's good. We have the two largest countries in the global economy. I think both countries will benefit from a free flow of capital and goods and services between the two countries. I think that free flow, although it opens both countries to market forces, those are short-term market forces, I think cooperation between the two countries and coping with those market forces will create a more stable system.
So I think the two countries have a mutual interest in working together to keep the global economy and the global financial market open and stable. So I think the potential of China-U.S. financial cooperation is good.
Host: With the goal of restructuring the economy to a more consumption-based growth model, Premier Li Keqiang said in the newly-released government work report that China will deepen reform of the financial sector, and continue to liberalize interest rates. From your 40-year experience as a Federal Reserve veteran, what lessons could be drawn from what has happened in the United States for China during the process of financial liberalization?
Kohn: I noted that deposit deregulation in the United States occurred over the 1980s, and that it was absolutely necessary for many of the same reasons that China is experiencing — there were places to put your wealth outside the depository system. That disintermediation was creating distortions. So it was necessary to free up rates for banks. But we encountered some financial stability challenges in doing that because some of the institutions really couldn't afford to pay the higher rates, and that caused difficulties in the United States.
So I think my caution for China is, yes, go ahead with its deposit deregulation, that's very important, but be sure that the institutions that are paying more market-based rates have the earnings, the capital and the risk management to deal with more market-based sources of funds. I think deposit deregulation is absolutely necessary, but it needs to be managed and staged to maintain financial stability.
The second lesson from the United States is the importance of a strong systemic focus for China's regulators. Like the United States, China has different regulators for the banking system, for the securities market, for the insurance systems, and then, like the U.S. a lot of responsibility for the central bank. And I think it's really important that they work together to make sure the system remains safe. If each one is just concentrating on its own area of the financial markets, adverse things could happen…there will be regulatory arbitrage, funds could flow between areas of the financial markets, and without someone stepping back and looking at the whole system, the vulnerabilities could build up, which is one of the things that happened to the United States in the 2000s. We had vulnerabilities built up partly in the banking system, but partly outside the banking system in our shadow banking system, just as you have a shadow banking system, and someone needs to be looking at the whole picture.
So those are the lessons for China based on my own experiences. The two main ones — proceeding with the deregulation, but managing it; and then the strong systemic focus.
Host: Besides interest rate deregulation, liberalizing China's financial sector also requires a progressive easing in exchange rate policy, which is already underway. So what is your advice on China's exchange rate reform?
Kohn: My advice is to move as China is moving toward increasingly flexible exchange rates. I think that it's important for China to reorient its demand away from reliance on exports and on credit-financed capital spending, and more on consumption. I think it's important for the world economy that China does this.
And I suspect that further flexibility in the exchange rate can absorb some of the shocks coming from the global economy and can reallocate spending within the global economy. And that will make everything more stable.
So I am strongly in favor of China continuing the progress toward a freer exchange rate and less intervention in the market. I think China will benefit and the global economy will benefit.
Host: Lastly, among the many reforms in the financial sector that China needs to pull off, freeing up the capital account is perhaps the most delicate balancing act, and requires careful planning and prudent implementation. Could you lend us some expert advice on that?
Kohn: I do think a staged opening of the capital account is the right way to go, but I also think that it's important in my mind not to open the capital account before the institutions who might be receiving inflows and making capital investments abroad have the ability to manage those inflows and outflows. So one of the vulnerabilities that came before, let's say the Asian financial crisis, was opening the capital markets before the domestic institutions were ready for them, which led to the buildup of the vulnerabilities. For example, domestic institutions were borrowing in dollars and then investing in local currencies and they had a really unbalanced portfolio and weren't ready to manage the risks.
So I do think the gradual liberalization of capital account would be important to China to help its system be more efficient and to increase productivity; and the deregulation will give both households and businesses places to put their funds and more ways to borrow. But it has to be done in a way that protects the system. So I would be wary of liberalizing capital flows before the system was ready — the Chinese financial system had the ability to handle some of the flows that might come in.
So I think the deregulation of the system, the strengthening of the system, the liberalization of capital flows all have to occur side by side.
Go to Forum >>0 Comment(s)