2月10日，上海交通大学上海高级金融学院副院长朱宁教授做客CCTV NEWS《Dialogue》栏目，就美联储收紧量化宽松政策，以及中国如何免受影响等问题，朱宁教授发表了独到的见解。

Quantitative easing winds down

Host: Hello, welcome to Dialogue. I’m Yang Rui in Beijing. There are increasing nerves among emerging economics. Now, the US Federal Reserve has started the winding down, the policy of a quantitative easing or QE. At the same time, the Fed is in new hand, following the installment of Janet Yellen as chair. As the world’s most powerful central banker, she has to perform the balancing acts with joining the massive financial stimulus of QE without disrupting the market, especially the emerging markets which could suffer major outflows of capital. How can countries protect themselves from the possible impact? Is China immune from the impact of QE tapering? Should the US show more concern about implications of its policies on the rest of the world? To examine these issues, we are happy to be joining in the studio by Mr. Joerg Wuttke, advisor to the Organization of Economic Cooperation & Development, and Professor Zhu Ning, from the, he is deputy dean of Institute of Advanced Finance at the Shanghai Jiaotong University. But, first, let’s take a quick look at the background report.

Host: Professor Zhu, did you watch the congressional hearing about her appointment? Do you think she is ready?

Zhu Ning: I think she is. I mean, I think, as the other guest mentioned, I think, she has a lot of credentials under her belt and not only that, she has a lot of experiences which is not only the central bank but also how the monetary policy has been made over the past few years in which the quantitative easing has been pushed out. So I think she is the right person to have the continuity coming from Chairman Ben Bernanke in the way that, for one thing, she knows what has been the background, what has been the motivation behind the quantitative easing; on the other hand, I mean, she has, just as Chairman Ben Bernanke did, just the right amount of research and academic credentials which will back her when top decisions have been made.

Host: I believe the media attention must be focusing on the issue of tapering. Many believe that defining theater of Yellen’s first year in the office would be her management of the rest of tapering. Do you think she would live up to the expectations of the media, Professor Zhu?

Zhu Ning: Well, I think it really depends on how high of the expectation has been set for her. I mean, I think she not only has the academic background, she also has alike more experiences as a central banker than Chairman Ben Bernanke when he was in his office. In that sense, I think she would live up to the job. But the question is what people really believe in what’s going to happen in this year, because given just the whispering of the potential tapering off of the quantitative easing, they have already set the emerging markets down by 13% in some of the same cases. So it is not about what she is going to do. It is about what the market expect her to do and whether her decisions live up to or live down to the expectation, just more of the magic between her decision and what the market’s expectation is.

Host: Emerging markets, including China are definitely stick holders in the same boat; but China might be a very rare exception, because the Chinese monetary authority has been able to close the capital account and prepare for the worst case or scenario. What do you think of the performance of, say, governments in India, Brazil and South Africa?

Zhu Ning: I think we have already witnessed a lot of recovery cautions from the tapering off of QE or just the whispering of that to emerging markets. I think, India, Indonesia have been focusing on their currencies developed by 30% and some of the other countries, for example, Brazil and Turkey have seen the depreciation of the Federal Reserve which would eat into the stability of their currencies very soon. So, I’m sure emerging markets in general are going to feel a lot of trills from the tapering off of the quantitative easing; however, I think China is in a sort of fortunate position in a way that China is not, the capital control is not been relaxed. So the timing is not too bad for China, which means that China still has some relax reserve when it can turn to if there is a lot of the capital. On the other hand, I think let’s not forget, China is in this procedure of trying to reform its financial sector and in that the relaxation of capital flow or the utilization of RMB as an international currency. Its importance is not a pivotal component. So it is not clear that China would just shut its capital accounts. I think to certain importance, China would still try to relax the capital flow as long as it warrants the stability and the safety of Chinese domestic financial system.

Host: Let’s come back to examine South Africa. With the outbound flow of the capital, what do you think of the prospect of guaranteeing enough FDI for the investment? Without investment, no jobs will be created to tackle the political issues of any province or state in most of the developed countries. Do you think Brazil, South Africa and India will both, will all suffer, you know, the ill impact of the outbound capital flight?

Zhu Ning: I think without the doubt, I think most emerging new economies will suffer its matter of different extents, although suffer from the flight of the capital or the exit of foreign capitals. There are a couple of reasons. One is, many of the emerging economies, during the past five years, after the stimulus packages of the quantitative easing, have been benefitting from a lot of capital inflows. Those inflows have been helping in creating jobs, in creating career opportunities. And now that there is a reversal of that capital inflow, so I think that would definitely put a dent to those economies in emerging markets. The second, let’s not forget about most of the currencies in emerging markets have been appreciated over the past five years which gives those countries greater privileged powers in the international markets and now that trade is also being reversed which means that the emerging markets would have to buy the same stuff for more of their own domestic currency which are the double ones. And that is not going to work out too well for most of the emerging economies especially those ones which are not prepared for such instance.

Host: Emerging markets or BRICKs economies were able to lead the world economic growth. Now, developed countries say that would no longer be the case with the grain destatization in the US and shale gas revolution in the US. Do you think it is time to reconsider the role the emerging markets play in the slow economic recovery of the whole world?

Zhu Ning: I think it is a little bit too early to make that conclusion. I think, I mean, the emerging economies in general is still making far greater contributions to the entire world economic growth and the developed ones. And also, let’s not forget the side of the emerging economies has grown considerably in the, over the past decade. So, it is no longer the case I think ten years ago when people say, well, there is going to be a dis-linkage between the emerging economies and the developed economies. I think now there is only one integrated economy. So, I think the emerging economies have made themselves so big and so important that they can no longer be ignored. So, I tend to largely agree with your comment earlier. But then, it seems that maybe the central banks in the developed economies used to be able to ignore the feeling or the impact of the emerging economies; but now, given the sides and the impact of emerging economies themselves, they can no longer be ignored. So I think whatever the Federal Reserve is going to make its decisions, they would have to incorporate the rebound caution as going to rebound back from the emerging economies. So, I think, that’s, if anything, one big progress that has been made over the past decade by the emerging economies.

Host: Thank you very much. When we come back, we have to take a look at the why reforms in those major emerging economies came to a standstill instead of pinning their hopes on IMF and the World Bank. We will be back in a few minutes. Stay with us.

Host: () said among to manipulation of RMB, currency policy, or exchange rate regime because use of the word of “the rigid control”. Now some of the rumormongers from the US also accused China of manipulating RMB, particularly during their campaign. Is it true that we are waving behind when we shouldn’t reached in terms of reforming the exchange rate regime, Professor Zhu? 

Zhu Ning: I don’t necessarily think that is the right question. I guess the right question is what will be the mechanism for Chinese RMB to be determined. I mean, whether it should be determined by the central bank alone or the markets which will be allowed to play a role. And I think we are moving definitely into that right direction. And also let’s not forget about those particularly lowly questions about Chinese manipulating its RMB. I mean that has been going, coming and going. I mean, I think, for the past decade, but then, for not, for signaling China has that been really standing up to the careful examination. So, I think if you are listening to the World Bank or the IMF, I mean the Chinese RMB may still have another 10% of appreciation, that is, to appreciate to about 1 US dollar to 5.5 RMB. That is probably likely upper limit of Chinese Yuan is going to appreciate. In that context, I think Chinese, I mean, Yuan or the relaxation of Chinese RMB mechanism is actually not quite slower than what the market or what the world has been expecting. So, in that regard, I think, pretty much giving out a pretty clear guidance for what’s going to happen, I think China or Chinese central bank is following that briefing very carefully.

Host: Because of the increasing capital outflows in China, non-necessary because of tapering, do you think control is likely to be relaxed so that the reserve ratio requirement will be reduced to ensure money supply to ensure investment and create jobs in the break of Spring Festival. And currently, the interest rate is high. What should be done to liberalize interest rate?

Zhu Ning: I think that is a very good question. I think that is probably holding the key to the entire reform in Chinese financial sector and also to the entire Chinese economy. I think it is not very likely, we are going to say, the savings, the reserve requirement to be lowered, for two primary reasons. One is, even though, I think, we are seeing a credit challenge here or there or now and then. We are still experiencing a lot of excessively liquidities. So let’s not forget that we are still having a lot of money been flooded around tracing real estate properties, tracing investment projects, tracing trust projects. And on the other hand, I mean, this is more of, I think, as you mentioned, this is more of a temporary issue. This is right after the stop of Chinese New Year break. Many plants, many companies just went back in business and the banks are not quite catching up with the supply of monetary. But I think you asked a more important question which is how to liberalize the interest rate or how to make the banking system reformed better so that it can help the real economy. And I think, I mean, Mr. Premier Li Keqiang made a very good point about how to utilize the increment of capital and try to use that to make a better use of the existing or immature capital. So, I think that would be the spirit. How could we, as you mentioned, how could we use the increase in the monetary supply and try to use that money to make the existing monetary supply into the more productive rate, not into real estate, not into infrastructure, not into those things which cannot generate cash flow, but into, say, small and medium enterprises, try to create more jobs, try to preserve or protect environment better, those things which can really deliver some tangible cash flows. So I think that change in the mentality and in the approach would help to reform.

Host: You are right. Some of the outbound capital flight is delivered and engineered by the Chinese government, if you look at the prospect in investment in the infrastructure, power plants, as well as, high speed railway in some of the developed countries. But within addressing issues like possible revocation of overseas or international investment from China to other lower income countries, within addressing the issue of whether negative impact would be delivered to the Chinese markets. But we haven’t addressed the huge foreign exchange reserve that we preserved that may help find out the negative impact. What about the financial reforms? What about in a parallel and parallelism without the emerging markets, China’s ability to reform its own financial system? Is it a step of like what’s, as described, coming to a standstill in India, South Africa, and Brazil? What’s the latest in China?

Zhu Ning: Well, I think what’s happened to the other emerging economies is actually setting up an alarm to China. So, I think China is going to be motivated to do more financial reform. And I think there are probably three areas that people are focusing their attention for. The first is, I think, domestically, it is definitely the liberalization of interest rate. I think whatever we are talking about the wealth management products, the internet financing, the credit challenge, I mean, those of course in a short round, are negative, are bad shocks. But then that is actually a necessary experience for the liberalization of interest rate, I mean, only when some companies start to feel the pinch in their financing. That is good news. That is because the capital is becoming more pressures and people are paying more attention to that. And if domestic problems can be probably solved or settled, and then, Chinese, I think, financial system can be better integrated into the global financial system. And when that happens, I think China would be in a better position to relax its capital flow chart. And then, by that time, I think Chinese RMB will become a more meaningful and more eventual international currency and hopefully in 20 or 30 years, China will become a truly international player when it comes down to the entire global economy, when it comes down to the entire global financial system.

Host: Thank you Mr. Wuttke and Professor Zhu for your insight for analysis. We are discussing whether Janet Yellen, the newly elected chair of Federal Reserve, would be able to manage the rest of the tapering without jeopardizing financial stimulus steps particularly in emerging markets. I will see you next time, until then. Goodbye.

Quantitative easing winds down