Zhou Xiaochuan: Interest Rate Policy Must Consider Domestic Demand and Stock Market

Appropriate appreciation of the renminbi will help curb inflation, but restraining inflation will not be the main reason for exchange reform. China's monetary policy is looking for a balance between curbing inflation and expanding domestic demand.
Zhou Xiaochuan, the governor of the Central Bank, said at a press conference at the 11th National People's Congress yesterday that there is still room for upward adjustment of interest rates, but interest rate adjustment must consider and measure the impact on expanding domestic demand and developing capital markets.
He also said that the suppression of inflation will not be the main reason for the reform of the exchange rate mechanism.
At the first press conference of the National People's Congress, Zhou Xiaochuan and Ma Kai, director of the National Development and Reform Commission, and Xie Xuren, minister of finance jointly faced a series of questions on macro-control. The issues raised for Zhou Xiaochuan mainly focused on China's interest rate and exchange rate policies.
Interest rate adjustment is "artful"
From 2003 to 2007, the central bank raised the benchmark interest rate for one-year deposits by 2.16 percentage points on eight occasions, and raised the benchmark one-year benchmark interest rate by 2.16 percentage points on nine occasions. However, since the United States has cut interest rates by 125 basis points, the market generally believes that China has a relatively limited space for raising interest rates.
Zhou Xiaochuan acknowledged that the downward adjustment of US interest rates will have an impact on China's interest rate policy, but this effect is only a part of it, and domestic factors must also be considered.
“We must consider and measure the impact of changes in interest rates on consumer domestic demand. The so-called “enhancement of domestic demand for consumption also hopes to reduce domestic savings rates and expand consumption. Therefore, interest rate policies will have an impact on the implementation of this measure and need to be considered.” said Zhou Xiaochuan. .
Zhou Xiaochuan also stated that the interest rate policy also needs to consider the impact on the development of capital markets and direct financing. At present, China still needs to vigorously develop the capital market and encourage direct financing. Therefore, these factors must also be considered when considering interest rate policies.
"In addition to the spreads and inflation in China and the United States, there are also several factors that need to be considered and need to be selected through comprehensive comparisons. At the same time, there are some other measures in monetary policy. Which one is better or which of them is better? There are many considerations on how to collaborate with each other.” Zhou Xiaochuan said that the timing and rate of interest rate adjustment are “artistic”. Lu political commissar of Industrial Bank's Capital Operations Department analyst believes that Zhou Xiaochuan's above statement actually means that the central bank will use the interest rate instrument more cautiously this year, and will not raise interest rates when it is absolutely necessary.
Suppression of inflation is not the main reason for exchange reform When it comes to the relationship between exchange rate and inflation, Zhou Xiaochuan said that from an analytical point of view, a proper appreciation of the renminbi or a little bit faster helps to curb inflation in the Chinese currency. However, for China, a big country, the suppression of inflation will not be the main reason for the reform of the exchange rate mechanism or the floating exchange rate of the market.
He said that in terms of controlling inflation, it may be more important to look at some domestic policies, including the implementation of tight monetary policy.
Since last year, the appreciation of the renminbi against the US dollar has accelerated noticeably. Since this year, the appreciation of the renminbi against the US dollar has reached 2.2%. Analysts had previously predicted that accelerating the appreciation of the renminbi would play a greater role in curbing inflation.
Zhou Xiaochuan said that in the future it will gradually expand the flexibility of the RMB exchange rate. However, the rate of change in exchange rates actually depends more on market forces. At the same time, the exchange rate mechanism is based on the supply and demand of the market, and it also refers to changes in the exchange rate of a basket.
Zhou Xiaochuan also said that China's real estate credit quality and risk control is still good, there is further room for development.
Zhou Xiaochuan: Regulating liquidity cannot be too tight. Zhou Xiaochuan, governor of the People's Bank of China, said yesterday that he cannot pressure too much during the adjustment of liquidity.
“If you press the liquidity down to zero, you will not be able to completely depress the investment enthusiasm. It is not very good. The strength should be appropriate to ensure a stable and steady growth of the national economy.” Zhou Xiaochuan said.
He said that from the perspective of China's characteristics, China's savings rate is relatively high, the bank system can flow more money, and has the basis for investment promotion. Therefore, there may be a relatively high degree of liquidity and high investment enthusiasm for quite some time. The process needs constant adjustment.
In terms of monetary policy, Zhou Xiaochuan emphasized the importance of the micro-mechanism reform. The macro-control system must rely on micro-mechanisms, especially financial institutions. These institutions must be healthy and their behavior must be rational and adapted to the market economy. Only under such circumstances can they correctly respond to the effects of macro-control.
Second, the effect of the implementation of monetary policy also depends on the transmission mechanism of monetary policy, which needs constant improvement and is suitable for the economic situation. He said that since the introduction of capital adequacy ratio regulation in China, the stricter and more effective capital adequacy ratio supervision has been implemented so far, which has played a very positive role in the transmission of monetary policy.
Regarding the impact of the subprime mortgage crisis, Zhou Xiaochuan stated that although China’s financial institutions have some investment and there has been some losses, the number and proportion are not large. China’s financial institutions are large in scale and operating conditions are relatively good. A small amount of losses can still be achieved. bear. The impact of the subprime mortgage crisis on the U.S. economy and the global economy and the indirect impact on China remains to be seen.
As for the United States to prevent economic recession and adopt other policies to relax monetary incentives, fiscal subsidies, or assistance, Zhou Xiaochuan believes that it may also lead to a more prominent global excess liquidity problem.
"China's excess liquidity has always been linked to global excess liquidity. If the problem of excess liquidity in the world could further deepen, then it will have a further impact on China's monetary policy. In short, not all of them are now available. We can see clearly, but we must follow closely." Zhou Xiaochuan said.

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