Zhou Xiaochuan is a noted
Chinese economist who is
currently the governor of
the People's Bank of China.
Ranked #4 in Foreign Policy
Magazine's 2010 report on
the Top 100 Global Thinkers,
Zhou is one of the most
figures in the world today.
PHOTOS/SHUTTERSTOCK, GETTy IMAGES
“RefoRm is a big systematic tRansfoRmation and
needs Reasonable aRRangements”
The Governor of The People’s Bank of China talks about Interest Rate
EmErging markEts insight 4
After more than ten years of reform, financing has decreased sharply, compared As a result, the loan interest rate reform
China's financial sector is ushering in the with the increased proportion of direct can move forward, and deposit interest rate
moment of transition from quantitative to financing. This proportional change reflects reform can be pushed forward in various
qualitative change. On April 14, the People's the reduced room left for interest rate con- ways, for example, by promoting the devel-
Bank of China announced the expansion of trol and the strengthened marketization opment of alternative debt-attached prod-
the floating range of RMB against the US dol- forces. The "barbarian growth" of private ucts and expanding the range of interest rate
lar from 0.5 percent to 1 percent from the lending in recent years is also considered to fluctuation.
16th day of the month. It has been 18 years be a new round of spontaneous currency
since 1994 when China launched the reform price protests from the grassroots against you once said that the Rmb exchange
of its exchange rate, during which the RMB financial repression rate was moving toward the equilibrium.
has been appreciating slowly, and is now Just like the double-track price system does this mean it is the right time to adjust
approaching its equilibrium. reform started in the 1980's, the double- further the exchange rate mechanism?
With the advent of the equilibrium point, track interest rate system will eventually go The situation of China's imbalance
the bi-directional nature of capital flows and towards the merger after it completes its between its international expenditures and
the exchange rate fluctuation are becoming transitional mission fostering marketization receipts has eased significantly. The ratio of
increasingly obvious. The unilateral pressure forces. All these have been included in the its current account surplus to GDP has come
on the appreciation of RMB and the possible blueprint designed by decision makers. down to 2.8 percent. Supply and demand in
negative effects caused therein will be eased From the viewpoint of Zhou Xiaochuan, the foreign exchange market tends to be
gradually. This will naturally result in the the Governor of the People's Bank of China, more balanced, with the RMB exchange rate
reform of the exchange rate mechanism, it seems that basic conditions are ripe for approaching equilibrium. The trend for the
and the dominant control over the interna- advancing the interest rate marketization offshore NDF market also shows that expec-
tional pricing of the RMB will further give way reform: The fulfillment of a new round of tations for the RMB exchange rate have been
to the market. banking reforms which began in 2003 has divided. The current exchange rate better
Compared with the breakthrough in the strengthened the hard financial constraints reflects the supply-and-demand relations.
exchange rate liberalization reform, the fur- and risk control capability of financial institu- When the exchange rate comes to equilib-
ther promotion of interest rate marketization tions; after years of practice, the Shanghai rium, capital flows will be bi-directional, as
seems ready to proceed. In recent years, Interbank Offered Rate (SHIBOR) has will the exchange rate fluctuations. In this
financial disintermediation has experienced become an important foundation for pricing case, the difficulties in pushing forward
rapid development; the bond market is financial products; the supporting mecha- exchange rate reform will be reduced. As a
booming, and financial products have nisms for deposits and insurance, etc. are result, the conditions to further improve the
become important substitutes for bank ready to be introduced. Inflationary pressure current exchange rate mechanism are more
deposits. The proportion of bank credit loans at the macroeconomic level is becoming mature.
to the total volume of social weaker and weaker.
Premier Wen once said he aims to "make
the Rmb floating exchange rate regime
more bi-directionally flexible." do you think
there is a big risk in widening the floating
Financial Reform Process range of the Rmb exchange rate?
Regarding the specific reform measures,
Absorption of Liquidity
whether to expand the 0.5 percent daily
Floating Exchange Rate Reform floating range, or make a better use of the
PHOTOS/SHUTTERSTOCK, GETTy IMAGES
Interest Rate Liberalization functions of intermediate prices, intraday
prices, and closing prices prevailing in the
Financial Institution Marketization
foreign exchange market? in the process
Financial Market Reform
of widening the range, will the frequency
Regulation, Risk Management and means of intervention by the central
Capital Account Liberalization bank be changed?
Since the exchange rate reform, the for-
STEP 1 STEP 2 STEP 3
Source : IMF, 'China: Financial System Stability Assessment,' 2011
eign exchange market has become more
and more mature. With the trading volume
EmErging markEts insight 5
growing, the varieties (of products traded) ket makers after opening in the morning by layoffs, or even bankruptcies, so the
increasing, risk-control capacity of the trad- referring to the inter-bank foreign exchange employment pressure will increase. If the
ing counterparties gradually increasing, and market rates and the changes in exchange exchange rate change is a bit slower, you
the willingness to price being independently rates of the main international currencies. If can give enterprises time to make adjust-
enhanced, the RMB exchange rate requires a market exchange rate flexibility is enhanced, ments accordingly.
greater fluctuation range in order to adapt to the central parity price, intraday price, and During the continuous optimization pro-
the further development of the foreign closing price of the RMB exchange rate will cess, some groups in the economy will bene-
exchange market. naturally become more flexible as well. With fit, while some will be negatively affected, so
If the floating range is too small, it is easy the expansion of the RMB exchange rate there are different views on exchange rate
for the RMB exchange rate float to touch the floating range, the forces between supply reform. For example, coastal export regions
boundary. When the exchange rate floating and demand in the market will play a greater are more concerned about the rise and fall of
range is expanded, businesses and residents role, while the central bank should interfere the export industry, local employment, and
will pay more attention to the role of the only when the market exchange rate fluctu- inward foreign direct investments, while
price factor as well as the market allocation ations exceed the limit. So the frequency of inland areas may have other concerns. From
of resources. We will take measures to man- intervention will be reduced, but also an economic point of view, it is best for the
age the exchange rate risk actively, and rein- become more flexible. exchange rate to remain close to the equilib-
force the micro-foundations for setting the rium point. If the exchange rate deviates
exchange rate. The so-called "expanding the the exchange rate is an important price from the equilibrium, it will lead to disloca-
floating range" should expand the 0.5 per- of funds. the exchange rate reform relates tions in the allocation of resources, resulting
cent floating range of the trading price of to the issue of optimizing the allocation of in losses to the national economy and also
RMB against the US dollar in the interbank foreign and domestic resources in china's creating difficulties for China's monetary pol-
foreign exchange market. economic development. there is no con- icies. But these losses and difficulties are not
Historically, the RMB exchange rate float- sensus on the exchange rate reform as so intuitive, and usually are not understand-
ing range has been gradually expanded. The some are in favor of it and some are able by common people.
RMB exchange rate floating range was 0.3 against it. Why does it attract so much con- In particular, if the US requires the appre-
percent in 1994, then 0.5 percent in 2007. troversy? ciation of RMB, the problem will become
Up to now, as the floating range has passed There are two main reasons to explain more complex. To some people, what the US
the five-year adaptation period, and with the why the exchange rate issue is so contro- requires is certainly not a good thing.
construction and development of the foreign versial: First, the impact on employment. If
exchange market since the exchange rate the exchange rate changes too fast, enter- When debating exchange rate reform in
reform, the capabilities of the market mem- prises are unable to adapt. This may lead to 2003 and 2004, people had different ideas;
bers to perform independent pricing and risk some adv oca t ed the "pr ogr essiv e"
management have continued to improve. approach because they believed that the
The ability of enterprises to bear the floating risk would be too large in the case of a
exchange rate has also been enhanced. one-time adjustment, while some advocat-
There is a need to expand the RMB ed a "big jump" approach. What do you
exchange rate floating range appropriately think about this issue? is it time now to
to accommodate the further development of make a one-time "big jump" adjustment?
the foreign exchange market and to reflect In 2005, the exchange rate reform was
the more dominant role of the relationship conducted in a "Big-Jump-and-Progressive"
between supply and demand. Of course, the combination where the first step was to
central bank also has various means to jump and the second step was to make pro-
administer and regulate the exchange rate gressive adjustments.
when necessary in order to maintain the However, people had different ideas about
normal floating range of the RMB exchange the jump-like adjustment with some people
rate, so the risks can be effectively con- advocating 5 percent, some suggesting 3
trolled. percent, and some believing it should not go
The central parity price of the RMB higher than 1 percent. Finally, we decided to
exchange rate is currently formed based on jump by 2 percent. That exchange rate
the prices quoted by foreign exchange mar- reform did not generate the significant
EmErging markEts insight 6
ion, should the new round of interest rate
marketization reform be pushed forward
as soon as possible?
The interest rate marketization is a pro-
cess. Before 2003, the floating range bank
loan prices were limited to less than 30 per-
cent, but in 2004, the upper limit for loan
interest rates was extended to 1.7 times the
benchmark interest rate. In October 2004,
the cap for loan interest rates was cancelled;
and the lower limit was set at 0.9 times the
benchmark interest rate. At the same time,
China began to allow bank deposit rates to
impact that people had imagined, but it did to long term, making future investments float down without any lower limits. The
reduce the international pressure, taking a focus on domestic demand (especially the inter-bank bond market interest rates were
step forward towards the improvement of service sector). An appropriate reduction in also liberalized. We also advocated liberaliz-
the exchange rate mechanism. investment in production capacity for ing the corporate bonds interest rate.
Now that we have identified the strategy exports will help promote domestic demand- Although we haven't liberalized the banks'
of progressive reform, and have gone with it oriented industrial restructuring in the medi- lower limit for lending rates, some quality
for so many years, we are approaching the um term. enterprises were freed to issue corporate
target, so we should continue forward. It is bonds at a price without being limited by the
not necessary to alternate progressive the internationalization of the Rmb is benchmark lending rate.
changes with "jump-like" changes. As China continuing to accelerate. some advocate At present, interest rate marketization
is a major power, I believe that we can reverse-forcing domestic financial policy reform can be further advanced, as it is
achieve the target by keeping on the "pro- reform through the internationalization of being designed and tested. We can take a
gressive" approach. the Rmb. do you think this reverse-force step forward in the reform of the lending
mechanism actually exists, or not? interest rate, and the deposit interest rate
in your opinion, how can the domestic The "reverse-force" idea always comes reform can be pushed forward by promoting
exporters make their adjustments to from comments "after the fact." In promot- the development of alternative liability prod-
address the appreciation of the Rmb ing the process of internationalizing the RMB, ucts and expanding the range of interest rate
exchange rate, and how much impact will no one can expect to perform "reverse- fluctuations, among other measures.
be imposed on the export industry? force" reform, and this approach is not very
The exchange rate reform relates to the realistic. you have been stressing that the hard
time for the improvement of export enter- However, we do not rule out the fact that constraints over the bank-related financial
prises, including how to make progressive the "reverse-force" idea is like the "forcing institutions are the premises for interest
adjustments on products and technologies, -rebounding" theory. If some areas need to rate marketization reform. can you tell us
and how to win back some of the pricing be reformed, but it is impossible to do, we something about the present status of hard
power. In fact, the pricing power of Chinese can first reform other aspects, thus creating constraints over china's financial institu-
enterprises has gradually been expanding. pressure on the slow aspects, and then push tions and their progress? Why do we have
Our survey finds that the adjustment capaci- forward reform of those aspects which are to control the upper limit for deposit inter-
ty of Chinese enterprises is also strong. difficult to advance. This possibility is too est rates and the lower limit for lending
Many export enterprises have survived dur- dramatic and story-like, so this will not hap- interest rates during the 2014 reform?
ing the reform process. pen when conducting the conventional This should be seen from two perspec-
The numbers of export enterprises which design. tives. Before the global financial crisis, we
laid off workers on a large scale and went were studying in detail interest rate marketi-
bankrupt due to the exchange rate reform it has been many years since we began zation reform. We felt that the progress of
were few. This is also a benefit of the pro- to discuss and implement the chinese the reform varied among banks. I should say
gressive reform. The exchange rate adjust- interest rate marketization reform. Where that banks — after the shareholding reform
ment will give a clear signal over the medium do you think the reform is at? in your opin- — had basically realized the hard constraints.
EmErging markEts insight 7
debt or related businesses (such as the
absorption of deposits). In this regard, this
may not be well received by banks partially
because the long-term interest rate control
allows commercial banks to form a strong
dependence, so when customers question
them, they can also pass the buck to the
central bank by complaining that they do not
determine the price. The other side of coin is
that once the interest rate controls are can-
celled, commercial banks will face greater
market pressures, including competition for
loans and also competition for deposits.
They have to give their own explanations
to customers. For example, after the
Wenchuan Earthquake, the People's Bank of
China expanded the lower limit for commer-
cial individual housing loan interest rates to
It was possible for them to worry about the rural credit cooperatives had not yet been 0.7 times the benchmark interest rate, which
increase in costs for deposits, with the result established at that time. enhanced the independent pricing power of
that they were not willing to raise interest At present, almost one-third of rural credit financial institutions. However, some finan-
rates on deposits. Some banks had not yet cooperatives' capital is compliant with the cial companies do not want to exercise their
finished their shareholding reform, so they regulations, one-third needs one or two independent pricing right for their mortgage
were not bound by the hard constraints; years to reach the standard, and another loans for housing.
thus, they could compete with each other one-third hasn't reached the 4 percent capi- Although the reform cost has been gradu-
regardless of the actual costs and benefits. tal adequacy ratio. About less than half of ally absorbed and hard constraints have
In addition, the financial constraints on com- their capital is negative. If there are no effec- been established gradually, there are some
mercial banks and policy-driven banks are tive capital constraints, competition will often issues at the grassroots level such as the
completely different, so there is no way to be cautious. What will happen to the worst uneven progress of the reform of rural credit
create fair competition between them. one-third of rural credit cooperatives if we cooperatives. With the outburst of the finan-
Before the full realization of the hard con- accelerate the interest rate marketization cial crisis in 2008, a new situation has been
straints over financial institutions, the trend reform? Do we give or not give them inde- created.
was for the poorer quality banks to dare to pendent pricing power? In a case of unfair
raise their deposit interest rates, for some competition, the ethical risk will emerge, so What is the new situation?
securities companies that were in trouble we should give them time to meet the stan- After the crisis, the developed countries
were having to issue OTC bonds at a higher dard. began to implement quantitative easing of
rate in order to save themselves. They just monetary policy with very low interest rates,
took a risk to see if they could survive the marketizing the interest rates means leading to the flow of "hot money" to emerg-
crisis. that commercial banks will be entitled to ing markets with relatively high interest
In fact, the pilot reform work was first the independent pricing power, but what rates, including China.
conducted at the beginning of this century, about the current independent pricing Our basic view is that we need not be
allowing the rural credit cooperatives to raise capabilities of the commercial banks? afraid of "hot money," because we can build
their deposit rates. However, they quickly One cannot say that all issues can be a "reservoir," such that the central bank can
raised their deposit interest rates to the cap, solved as long as control over interest rates hedge the hot money when it comes, not
and then passed the risks on to lending is released. Commercial banks have to price allowing them to expand the money supply
interest rates, thus raising the overall finan- independently after the interest rate mar- so as to reduce the negative influence on the
cial costs of enterprises. The competition ketization is completed, not only including national economy. Later on, the "hot money"
over the deposits reflected the fact that the the independent pricing of lending interest can freely flow out, even after making some
capital and cost constraint mechanism of rates but also the independent pricing of money because they do not earn very much.
EmErging markEts insight 8
However, there are many departments factory or hampered, potentially even com- system and selective exit mechanism, based
and experts worried about the inflow of "hot ing to an untimely end in the process. on selecting the superior and eliminating the
money." In a situation where people are not inferior among financial institutions, are both
satisfied with domestic inflation, "hot We note that, in your recent article pub- under construction, and will create a more
money" always becomes a target for criti- lished in China Finance, you pointed out favorable environment for financial institu-
cism. Therefore, we must take control of the that the Pbc would go on actively promot- tions to conduct scientific and reasonable
"hot money." ing interest rate marketization, based on pricing for both products and services under
However, the difference between foreign the direction of related meetings of the market competition. Therefore it can be said
interest rates and domestic interest rates is central government, because the condi- that the conditions for further promoting
clear, so what can we do to address the prof- tions for it are ready. What's your basis for interest rate marketization are basically
it-driven motive behind "hot money"? Under this judgment? is it feasible to relax inter- ready.
such pressure, we need not hurry to est rate regulations at this time? Of course, it's impossible to make all
reform deposit interest rates. Interest rate marketization reform conditions fully ready. People recog-
Therefore, the negative was written in China's "12th nize the merits and demerits of reform in dif-
real interest rates are Five-Year" Plan, and we ferent ways through all periods. In addition,
formed by the joint also made a partial reform brings different benefits and costs to
effect of several fac- We need report on the "12th different bank groups and customer groups,
tors not intentionally a competitive market Five-Year" Plan for so banks and customers may have different
selected by us. structure, otherwise the financial sector. opinions or attitudes about reform.
"big banks may bully We decided to pro- Compared with the past, if the marketiza-
the international mote the marketiza- tion reform of interest rates is implemented
financial crisis is an tion reform of interest now, cut-throat competition is less likely to
influencing factor rates conditionally, but occur, but "hot money" may become a rela-
affecting the interest rate we have to overcome some tively more common occurrence. It's critical
marketization of our country. difficulties during this effort. to measure the merits and demerits of
are there any other significant factors Since 1996, with the relaxation of reform correctly as no single reform mea-
besides this? restrictions on interbank offered rates, the sure can be fully beneficial and without any
There are some other key factors. For marketization reform of interest rates has cost to anyone.
example, we need a competitive market been implemented stably, the market pricing
structure, otherwise "big banks may bully right of financial institutions has been in your opinion, what's the practical
customers" even if banks can conduct inde- expanded continuously, and the market route for implementing the marketization
pendent pricing in the event that there are mechanism has played a more and more reform of interest rates?
only a handful of banks. Once a competitive obvious role in the pricing of financial prod- An alternative would be to allow qualified
market structure forms, it can encourage ucts, including deposits, loans and bonds. In financial institutions meeting hard restriction
banks to compete with each other by means recent years, the financial reorganization conditions and macro prudent policy frame-
of the market, observing and respecting cus- and joint stock system reform of commercial work requirements to expand their indepen-
tomer's choices, and further, by improving banks have made periodical achievements, dent pricing right; establish and perfect the
their customer service. the hard restriction on financial institutions self-disciplined management of competition
In addition, macroeconomic conditions has been further enhanced, and their inter- in transition, and let the qualified institutions
such as inflation should be considered. When est rate pricing and risk control capabilities above begin conducting independent pricing
reform is driven during periods of low infla- have been greatly improved. for interest rates. Meanwhile, we should con-
tion, commercial banks experience bi-direc- Meanwhile, the PBC has gradually tinue to cultivate the market driven interest
tional stresses while doing independent pric- improved its capability of regulating market rate system, perfect the interest rate mech-
ing; as a result, prices may fluctuate. In con- interest rates by means of open market and anism of the PBC, and guide the improve-
trast, during periods of high inflation, people other operations, and also cultivated the ment of the interest rate pricing capability of
expect price increases, thus a unilateral market driven interest rate in the money financial institutions. The PBC has made
trend of prices is likely to appear even market (Shanghai Interbank Offered Rate, active and beneficial explorations of self-dis-
though independent pricing has been imple- SHIBOR) which is used for pricing financial ciplined pricing during the development of
mented. Further, the reform may be unsatis- products. In addition, the deposit insurance SHIBOR in recent years, and should go on
EmErging markEts insight 9
perfecting and enhancing such pricing in the infrastructure from time to time, no matter ments and regions will complain, so hedging
future. In this way, interest rate marketiza- whether construction costs are high or low, may well offend certain groups.
tion should be realized after a period of tran- given the drive to makepolitical performanc- If some tools of open market operations
sition. es. In addition, how do increases in interest are used for hedging, their effects won't be
rates influence the savings ratio and con- visible, but opponents will also make an
the reason for the slow pace of interest sumption? This issue may be significant objection affecting policy-making once they
rate and exchange rate reforms is that the when selecting policy tools. realize the intent. In addition, open market
marketization of chinese macro control In summary, China and developed coun- operations may obviously influence short-
has seemed insufficient over the past ten tries have some different worries, so Chinese term market interest rates. In summary, no
years, with monetary policies attaching policy selection should be based on the anal- methods are perfect.
more importance to quantitative tools rath- ysis according to our national conditions.
er than pricing tools. What do you think of can the "Pool" be richer in content?
this problem? can existing hedging measures counter- What are its effects?
First, Chinese policy-makers prefer quanti- act inflationary stress? What are their A good many methods are effective for
tative tools following the thinking behind the effects? What are the related difficulties? making appropriate money supply. Every
previous centralized planned economy in Amortization of reform costs is always a stage has its own characteristics. In our
which both supply and demand were medium and long-term issue not reflected in opinion, hedging measures are diversified,
planned, broken down, and conveyed to the short term. If the change in foreign but they are seldom noted. Once clarified,
lower levels according to quantity, regardless exchange reserves is not overly large, it they are usually controversial. The concept
of either the law of value or of price tools. won't obviously influence inflation in the of a "pool" is a vivid analogy put forward for
Hence, such preferences have a long-stand- short and medium term. absorbing excessive liquidity, which is mainly
ing historical cause. Overall, inflation is involved whenever the pertinent to the great increase of money
Second, in order to respond to the current money supply is excessive; thus, the excess supply experienced with an overly-quick
financial crisis, some western countries, e.g. should be hedged. If the hedge is sufficient, increase in foreign exchange reserves. It can
America and the Eurozone in sequence, obviously inflation won't result; moreover, be said that this method has a very good
adopted quantitatively relaxed monetary the excess can be placed in a "pool" and then effect. Meanwhile, this concept may be
policies. As a result, the globe has surplus released after inflationary pressure cools. explored and realized in different ways.
liquidity and strong capital flows, with quite a It is criticism of hedging measures that The reform of our country is a systematic
lot of capital flooding into emerging market brings inflationary stress. If the criticism is transfer to a different track and places higher
economies, while some countries were loud, the hedging may be insufficient, and requirements on the overall supporting rela-
severely shocked and objected to such poli- inflation may prove inevitable. With the tionship. Currently we need to consider the
cies. In this case, a natural choice is to increase in reserves against deposits, unfa- overall situation when implementing interest
respond to quantitative relaxation by quanti- vorable voices will be louder, some depart- rate and exchange rate reforms. Of course,
tatively tight policy. this doesn't mean that such reforms can't be
Third, an economic law of developed implemented until all conditions are fully
countries is that long-term interest rates rise mature.
with increases in inflation. As a result, the
interest in investing falls. In China, it's unique since the 14th national congress of the
that the savings rate is overly high; for communist Party of china, more impor-
example, household consumption accounted tance has been attached to the question of
for only 33.8 percent in GDP in 2010, and how systematic reform will or should be.
such a level of consumption is rather low. how should we understand how systemat-
How much will interest rate increases affect ic reform has been?
investment? Governments at all levels The reform of our country is a
make much administration-driv- systematic transfer to a different
en investment in infrastructure. track and places higher require-
Although high interest rates can ments on the overall supporting
increase long-term investment relationship. The central govern-
costs, they may still invest in ment and the s t at e c ouncil
EmErging markEts insight 10
emphasize such relations all the time. Price in resource allocation. here the issue is ple expect that relaxed macro policies can
reform has high support requirements, so how reform brings about benefits. at pres- alleviate the problem of "difficult loan acqui-
we need to create related conditions and ent, people pin their hopes on the market sitions and high loan costs," but only macro
take actions for the formation of a support- reform of interest rates to alleviate the policies inhibiting inflation are really helpful.
ive relationship; further, we must guarantee problem of "difficult loan acquisitions and
the realization of our objectives. Looking high loan costs." What are your thoughts this implies that marketization reform
back at the reform process, it can be seen on this? should b e pr omo t e d wi t h an e y e t o
that price reform has been combined with It can be said that our reforms, in general, resource allocation optimization rather
autonomous management and independent pursue optimal resource allocation than with reference to any short-
pricing by enterprises. Meanwhile, price and high allocation efficiency. term problems. therefore
reform is interlinked with indirect tax reform, Some people think reform we should clarify our
clarification of relations between domestic is intended to solve cer- thought, create related
prices and international market prices, etc. tain problems rather
Of course, this doesn't conditions, and
Therefore, we can see that the premise of than improve the remain determined.
mean that such reforms
keeping overall price levels relatively stable. overall efficiency of do you agree with
Further, the issue of marketization of factors resource allocation. can't be implemented until this?
of production are emphasized in "relaxing For example, some all conditions are Quite so. At first,
the restrictions on the prices of competitive people think the mar- fully mature. we shouldn't only see
goods and services, canceling the dual track ket reform of interest some superficial prob-
system for factor prices as soon as possible, rates is a recipe for han- lems when analyzing the
and quickening the marketization process of dling such problems as the mer it s and demer it s o f
factor prices" in the document of the 14th "difficult loan acquisitions and high reform. The main merit of marketi-
National Congress of the Communist Party of loan costs," as well as high bank profits. zation reform is higher efficiency and optimi-
China. In the early stages of reform, people zation of resource allocation, as this is the
In view of the main supporting relation- always attributed the distortion of goods foundation of the benefits to the public rath-
ship, value-added tax reform and exchange prices to "long-distance transport, specula- er than a solution to a variety of different
rate reform were emphasized in 1993 and tion, and profiteering" during turnover. Later problems.
1994, supporting the market reform of good it was found that this attribution was wrong, In the past, many problems concerning
prices and factor prices to a very large although the circulation process is problem- low efficiency existed in our economy and
extent. atic, circulation, an intermediate link, mainly society, and all of them were directly or indi-
For the correction of price distortions, plays a role in conveyance. In fact, it only rectly related to the distortion of the price
attention should be paid to the following two delivers the problem of production to the system, but related reforms might impinge
aspects: I. Goods prices contain turnover retail market. The financial sector, similar to on the interests of some groups, and some
tax, and the product tax system was prob- the circulation discussed above, mainly play- people worried that price reform was likely to
lematic because of unfair tax rates and dupli- sthe role ofan intermediary and delivers its aggravate inflation and couldn't make up
cate taxation at that time, causing price dis- capital surplus to the customers demanding their minds, and some even attempted to
tortions; II. Domestic price levels were not money; thus, it usually also conveys or evade such difficult reforms altogether. Clear
consistent with international price levels, transfers price. recognition of all these problems can help us
dual or even multiple exchange rates exist- We should note that, "difficult loan acquisi- become determined to promote related
ed, both export rebates and import taxation tions and high loan costs," at a particular reforms.
were very difficult, and enterprises could not stage, are related to the macro situation of Reform is a big systematic transformation
participate in international market competi- high inflation rates and heavy stress on total and needs reasonable arrangements.
tion at the same initial price points, triggering demand control, and may not be always Meanwhile, Pareto improvement, i.e. contin-
a lot of trade friction. Smuggling and illicit solved by the micro pricing mechanism. If uous resource allocation optimization, should
exports further impaired overall interests. necessary, macro conditions aren't ready, be embodied in a progressive reform pro-
and relaxed restrictions on interest rates cess. Such optimization will bring about ben-
l ooking back at pr e vious mark e t may actually increase loan costs. The real efits and advantages. Just like a pie grows-
reforms, an important guideline is to give merit of interest rate marketization lies in bigger and bigger in the oven, it must have
play to the fundamental role of the market resource allocation optimization. Some peo- its own inherent theoretical basis.
EmErging markEts insight 11