Author: Fan Gang, President of CDI
Editor’s Note: Professor Fan Gang had a television exclusive interview with CBN on a series of macroeconomic issues including global market, monetary policy, and foreign exchange rate. Following are edited excerpts from the interview:
“Loose monetary policy cannot be used to control financial risks.”
Bursting credit risks have triggered heated debates since March. Given current supply-demand relationship, a prudent monetary policy shall be in place. Default becomes a natural thing due to high leverage and severe supervision caused by overheated economy. Financial risks need to be controlled, yet a loose monetary policy is not an option.
“Deposit reserve ratio reduction is not equivalent to monetary policy easing.”
At present, China’s foreign exchange reserves have been cut down. Therefore, reserve ratio has to be lowered to maintain quantity of money, which is a neutral rather than loose monetary policy.
“It is not about whether to maintain FX reserves or exchange rate.”
There is no need to protect FX reserves as China's foreign exchange reserves dropped below $3 trillion due to RMB internationalization progress like yuan’s inclusion in SDR basket and the fact that United States treasury bonds are low in efficiency and returns. Meanwhile, the renminbi will move towards a more flexible exchange rate rather than a fixed one that is pegged to the US dollar. Therefore, maintaining exchange rate is just groundless talk. Overnight foreign exchange reserve fluctuation is unwanted for any country. Certain measures will be taken to ensure stable transition in exchange rate or FX reserves.
“Be prepared for short-term appreciation and long-term depreciation of the US dollar.”
After Trump came to power, Sino-US relations are filled with "uncertainties", but several things are clear. First, Trump can no longer accuse China of currency manipulation; second, the Trump administration will increase trade frictions between the two countries, but will not launch a full-fledged trade war against China; third, Trump will reinforce public opinions through tax cuts and infrastructure investment growth. As a result, USD will appreciate in the short run with foreign investments attracted to the US and the prices of crude oil and staple commodities at the international market will be on the rise at the same time. America’s social security expenditure will continue to grow and its deficit and inflation will see a strong uptrend as a consequence of Trump’s tax cuts and intensified infrastructure investment. All this is likely to lead to depreciation of the US dollar.