Hello Spotted.Cat, On the RMB, I had posted this after a meeting held with some folks who should know, to serve as a note to myself Message 19813653 <<February 16th, 2004>> and as a signal to some friends who were about to make corporate presentations and/or strategic decisions, and others who were simply curious ;0)
Apparently, either I managed not to misunderstand the message or gave the right signal by accident.
And now Mr. Steve Roach posts the following:
Publication Date: April 26, 2004
morganstanley.com
Fireworks at Boao by Stephen Roach
New York
The Chinese invented fireworks. Historical lore dates the breakthrough back to the second century BC. So it was only fitting that the third Boao Forum for Asia — a gathering of the region’s leaders modeled after the World Economic Forum in Davos — ended with a glorious display of pyrotechnics over the waters at Dongyu Island in China’s island province of Hainan. The show in the sky, however, was nothing in comparison to the fireworks that had taken place a couple of hours earlier in the conference. A leading Chinese central banker put the world on notice that China’s policy makers mean business — and did so in the most direct and fiery language I have ever heard from any member of this normally reticent species.
I chaired one of the final sessions of this year’s Boao Forum for Asia. It had the seemingly innocuous title of “Financial Cooperation: An Important Step Leading to Asian Economic Integration.” Including myself, there were five panelists — representatives from the public and private sector alike. But the star of the show was Wu Xiaoling, Deputy Governor of the People’s Bank of China (PBOC). Madame Wu made a brief presentation on “East Asian Financial Cooperation” and then was subjected to a torrent of intense questioning from the assembled media, the likes of which central bankers rarely encounter. Lest you think that China’s press is under tight control by the state, let me assure you that there were no holds barred in this extraordinary confrontation. The questioning, of course, had nothing to do with Madame Wu’s thoughtful insights on the deep and important issues of this session. The press zeroed on China’s monetary policy debate — pounding away at the likelihood of the next move and then, of course, taking dead aim at the all-important currency issue. Normally, I would not provide commentary on a breaking news event. But inasmuch as this exchange will probably be reported — and distorted — by the international media, I think it’s entirely appropriate to offer my personal account of what transpired late on Sunday afternoon, April 25, at Boao.
The first segment of the session was devoted to the macro context of this topic and featured opening remarks by Madame Wu, Jin Liqun (vice President of the Asian Development Bank and formerly China’s Deputy Minister of Finance) and yours truly. (A full writeup of my presentation, The Rebalancing of a China-Centric Asia, will be available shortly on Client Link and Research Link). I encouraged the presenters to be brief and to the point, leaving ample time for what I hoped would be exchange and debate — my attempt to replicate the spirit of Davos. Little did I know of how spirited the give-and-take was about to become.
By way of backdrop, of course, the PBOC is on the global hot seat. In an effort to stem the mounting excesses of an overheated Chinese economy, it has tightened monetary policy three times in the past seven months. China’s central bank is also the nation’s official arbiter on matters of currency policy. Outside of China, of course, the world continues to believe that China must give way on its all-important peg — a fixed relationship between the renminbi and the dollar that has prevailed since late 1994. The currency argument has been couched in both political and economic terms — most recently driven by American politicians who blame China for trade deficits and a jobless recovery and also by those who believe that an “undervalued” RMB has become a serious source of instability for a rapidly growing and increasingly inflation-prone Chinese economy. For some time, the RMB issue has been one of the hottest topics in world financial markets. Speculators have been betting that it’s only a matter of time before China gives on this key pillar of its macro policy framework. Rumors abound on such a possibility each time a Chinese central banker takes the stage. Madame Wu’s appearance at the Boao Forum was awaited with eager anticipation as yet another opportunity to add to the great debate.
Her formal remarks at the conference — “East Asia Financial Cooperation: Chances vs. Challenges” — focused on an assessment of the post-Asian crisis record on regional economic and financial cooperation. At no point did she mention the PBOC’s policy intent. Only once did she take note of the currency issue, but setting it in the context of the pan-regional framework that was being discussed in this session. In her words, “Stability of (the) RMB exchange rate helps keep regional financial stability.” Then came the main event — a Q&A session, the likes of which I had never seen in the normally boring world of macro-speak that I travel in.
Questioner after questioner drilled her on the PBOC’s policy conundrum. In retrospect, it was a predictable and intense grilling: Will there be another monetary tightening? If so, when? Why haven’t the three tightening actions worked yet? What about the currency? When and under what conditions will the RMB peg be dismantled? And on and on. Madame Wu handled the questions with great patience, following the time-honored protocol of central banking to be both direct and circumspect at the same time.
Suddenly, there was a stunning change in her demeanor. I’m not sure exactly what triggered it —maybe the tenth question in a row on the same point — but she then went on the attack in defending the PBOC’s policy intent. In her words (through a translator), “The People’s Bank of China is focused on one thing — stability, and in establishing a mechanism to insure that stability. If you want to gamble with us, watch out! Speculators will be punished.” I don’t think this was an accidental slip-up. Central bankers do nothing by accident, in my view, and Madame Wu’s direct and simple words said it all. In contrast to rumor-driven world financial markets, the Deputy Governor of China’s central bank was baring her soul on the role that RMB policy plays in China’s macro framework. It all boils down to one word — stability.
China knows all too well what’s at stake in this debate. The most important lesson that it learned in the Asian crisis is that currency stability matters more than anything. As currency after currency went into free-fall in Asia in 1997-98, the Chinese bucked the trend and held the RMB peg steady. China hasn’t looked back. In my view, its adroit handling of currency policy was a key factor in China’s ascendancy to pan-Asian leadership in this post-crisis period. Now the context is different, but the conclusions are the same. Lacking in well-developed capital markets and only now embarking on the long road of banking reform, the Chinese financial system needs an anchor. The RMB peg serves that critically important function. Again, it’s all about stability — the most important guiding principle in China’s remarkable transition. And make no mistake, that’s where Madame Wu has drawn the line. With official foreign exchange reserves at US$440 billion in March 2004 — second only to Japan — China has ample ammunition to punish those who bet the other way. Those remarks make it very clear to me that the RMB peg is here to stay.
Madame Wu ended the session on a philosophical and very moving note. She pleaded with the broader public to take China seriously in its extraordinary mission of reform and transformation. In her view, the world has everything to gain from China’s success and much to lose from failure. She enlisted support from those in Boao as well as from those in the broader community. In her words, “I call upon everyone to take account of the safe journey of the Chinese boat.” She then disappeared into a sea of frenetic journalists, and I slumped exhausted in my seat after futile efforts to keep this session under control. The fireworks that were soon to follow in the night sky were beautiful. But they paled in comparison to the display in the halls of Boao. |
