Zhou Xiaochuan: Some people raise tariff barriers. We should also carry out reverse sanctions.

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 Zhou Xiaochuan: Some people raise tariff barriers. We should also carry out reverse sanctions.


On August 10, at the Yichun Forum of Forty People in Chinas Finance, Zhou Xiaochuan, President of the China Finance Society and former President of the Peoples Bank of China, said that financial opening has entered a new stage, but in the future it will inevitably encounter significant distortions in the global market system, including trade wars, the development of modern science and technology, and The United States-led countries have adopted monetary-based economic sanctions against some countries.

From a global point of view, resource allocation will be distorted or obviously distorted. It may be necessary to consider our countrys response strategies under distorted conditions, including the strategy of opening to the outside world, Zhou Xiaochuan said. Furthermore, although we do not want to see trade wars, if someone is targeting US We also need to impose reverse sanctions on tariff barriers or other actions. This is inevitable, although we are passive. But these practices will also have a significant impact on the international and domestic openness and the role of the market in the allocation of resources.

Zhou Xiaochuan put forward three points on the countermeasures:

First, we need to respond to trade wars.

The second is to study how to maintain a more competitive market order. Seeing the growth of market distortions, we try to reduce these distortions and solve them by paying more attention to fair competition.

Third, we should pay close attention to the internationalization of RMB. Because only after the internationalization of RMB, can we effectively resist the remarkable distortion based on the reserve currency of US dollar, which is produced globally, to maintain the policies we advocate such as globalization, trade liberalization, investment facilitation, multilateralism and the realization of the community of human destiny.

The following is the full text of Zhou Xiaochuans speech:

Dear President Chen Yuan, Governor Wang Wentao, distinguished guests and comrades, good morning! Its my pleasure to be invited to CF40 Yichun Forum again. I think this forum is very well run. I wish this forum a complete success.

According to the topic Financial Openness and Financial Science and Technology put forward by President Chen Yuan, I choose one of the two to talk about financial openness.

Financial opening-up should also be said to be an integral part of the overall opening-up. I personally believe that although financial opening has some particularities, the whole logic and reasoning as well as the applicability of experience and lessons are in fact consistent with the opening up of the whole economy. Of course, some people emphasize that financial openness is a very special link, but also a relatively risky link, which seems to be different from the opening up of industry, agriculture and other services. I think from the most important point of view, in fact, financial opening is still an integral part of the overall opening up.

The first topic I want to talk about is that opening to the outside world is a process of continuous evolution of economic thinking. There are some mainstream statements at each stage, but in fact, the process of thinking transformation is different for different industries and different people. We can review it briefly.

In the early stage, opening to the outside world paid more attention to attracting foreign investment, which was also reflected in the financial industry. For example, when introducing foreign banks, the first thing to look at is that they dont have enough money. If the assets are more than 20 billion US dollars, they can apply to China to set up foreign banks. So at this stage, more consideration is given to the introduction of capital. This phenomenon also exists in the capital market, that is to say, we mainly consider whether a certain policy of opening to the outside world will help foreign capital to come in.

In the future, opening to the outside world tends to see what projects we lack and what projects we lack can be more open. We hope to introduce peoples technology and practice, and at the same time enhance the competitiveness of the domestic market.

Domestic industries, including the financial industry, have been spread in all aspects. When there are talents in the institutions, the idea of protecting infant industries in the so-called industrial policy once occupied an important position. That is to say, the pace of opening-up should be properly mastered, and the new infant industries in China should be opened to the outside world after they have grown sufficiently. But this approach is often controversial. At the same time, it is difficult to determine when and at what pace to grasp this kind of opening-up.

Later, opening up was basically regarded as an integral part of global resource allocation and a part of the globalization of a global market economy. Through competition and cooperation, bring benefits.

A more obvious development is that after the 18th National Congress, China clearly proposed that the market play a decisive role in the allocation of resources. Subsequently, with the emergence of some new challenges in global trade, China clearly put forward its full support for globalization, trade liberalization and investment facilitation, and multilateralism. At the same time, we consider the global economic and trade order in the light of such a thinking as the Community of Human Destiny, which in turn reflects Chinas own policy of opening up to the outside world. In this way, the height of the station gradually increased.

Moreover, apart from the early opening and the emphasis on the introduction, we now pay more attention to going out, especially the one belt and one road. We have held the one belt and one way summit two times in 2017 and 2019.

In fact, by analyzing the whole process, there are many similarities between financial openness and the opening of other industries and other services. Is there any particularity of financial openness? Yes, indeed. I think the first one is that finance is more sensitive and involves the efficiency of major resource allocation. Therefore, at the Third Plenary Session of the 14th Central Committee, we formally defined finance as a lifeline industry, so we should be more cautious about lifeline industry. But it is not said that lifeline industries should be less or slowly opened. In short, how to explain lifeline industry has always been a topic for everyone.

In addition, there are two important events in the process of financial opening up. One is the Asian financial turmoil in 1997, and the other is the global financial crisis in 2008. There will always be such a situation. At the beginning, the reasons for the financial crisis are not too clear. In short, we feel that the financial environment is very sensitive, and if it fails, it will trigger the crisis. Therefore, we need to be more cautious about opening up. In fact, these two financial crises have indeed disrupted and delayed the main steps of our opening up. For example, in 1996, China realized current account convertibility and was ready to further promote capital account convertibility. However, with the emergence of Asian financial turmoil, this topic has not been mentioned for the time being.

Later, until the Third Plenary Session of the 16th Central Committee of the Communist Party of China mentioned again, we still want the RMB to gradually become such a currency that can be converted into capital account. Moreover, in terms of market access, when we formally entered the WTO from 1999 to 2001, we prepared to expand the proportion and scope of financial market access five years later. As a result, in 2007, there was a subprime mortgage crisis, and people became very cautious, so the process actually slowed down. This also shows that the opening up of the financial industry and the financial industry itself have a relatively high sensitivity to global stability, but also depends on everyone, especially the academic community, for the causes of financial crisis and how to prevent financial crisis in this area of research and discussion. Without certainty, opening up may be slower.

Anyway, we believe that financial liberalization has entered a new stage.

The second topic I want to talk about is that we may survive in a distorted market in the future.

Our own awareness of opening to the outside world has been increasing and our position is getting higher and higher, and I think it has also played a leading role in the world. In particular, President Xis speech in Davos the year before last attracted great attention from the whole world, believing that China can play a leading role in this regard. But in this case, we also see that the global market system is beginning to show some very significant distortions.

The first distortion is the trade war.

After the United States began its trade war, tariffs and other barriers were used. Now it seems that it is not limited to trade, but there are many other considerations behind it, including politics, military affairs, values, science and technology and so on. In this case, we should be prepared. Just now President Chen Yuan also talked about the possibility of a long-term nature. From a global perspective, the allocation of resources will be distorted tremendously or obviously. It may be necessary to consider our countrys response strategies under distorted conditions, including the strategy of opening to the outside world.

Moreover, although we dont want to see a trade war, if someone acts against us in terms of tariff barriers or other aspects, we also need to impose reverse sanctions. This is inevitable, although we are passive. But these practices will also have a significant impact on the international and domestic openness and the role of the market in the allocation of resources.

The Second Market Distortion and the Development of Modern Science and Technology

That is to say, it is related to the development of financial science and technology, the second theme of the CF40 Yichun Forum. In the process of IT technology and networking development, we found that many sectors of the economy began to appear network effects. This network effect may bring about winner-take-all or winner-take-up effect, thus bringing about changes in the means of competition. Traditionally, when talking about market competition, the main hypothesis used in the past is the diminishing scale effect. However, we know that there are individual industries, such as the image refining industry in the past, which belong to the industry with increasing scale effect. From the point of view of the whole national economy or the global economy, it belongs to a very small number of industries with increasing scale effect. But now it seems that more and more industries are showing an increasing scale effect. Increasing scale does not necessarily mean increasing scale in the traditional sense, but is brought about by the network effect. Related to this is that in the process of competition, there have been some practices to occupy market share and expand traffic by burning money. I dont think there is much to blame for these practices, because it is based on the network effect, based on a response to the phenomenon presented objectively. But it certainly poses important challenges to economics and economic analysis. In this case, economics may need to respond appropriately to it.

At the same time, we are not only concerned about how to deal with these phenomena in the domestic market, but also about the new challenges posed by these phenomena to opening up. Many of the worlds largest Internet companies are concentrated in the United States, such as FANG, which will continue to change in the future. It also poses new challenges to opening up.

On how to deal with this problem, economics has two small branches in the past. One is to study the industry with increasing scale effect. In this case, which direction will the general equilibrium shift? That is to say, the traditional general equilibrium is introduced into the regulation with the model of Walras general equilibrium. Increasing modular effect, specifically, is how to deal with the problem that the first several exponents in the production function add up to more than one. The second is to use a quota-based general equilibrium model to deal with this problem. This will be useful not only for new distortions in the future market, but also for economic sanctions and climate change (climate change brings restrictions on carbon quotas). But in general, it makes the economic mathematical model more non-linear. It may be necessary to use this technology to study the market under the new situation.

The third change is the US-led adoption of currency-based economic sanctions.

It involves Russia, Iran, Venezuela and so on. These economic sanctions obviously create a very obvious non-linearity, but also bring a very obvious distortion to the allocation of resources and the measurement of efficiency in the global market. They can do so on the basis of their control over reserve currencies, Global trade and investment trading currencies, that is, the US dollar, and there may be new ways to control global trading currencies in the future.

We say that when trading in dollars, whether trade or investment, the liquidation process will eventually reach the United States, so it can certainly use this advantage to observe you and impose sanctions on you. In addition, the United States is monitoring other global trading information systems by different means. It relies on its strong position and has this ability. Third, there are other scientific and technological means to monitor.

These links have a significant impact on globalization, global resource allocation, global supply chain and the optimal allocation of overall efficiency. Therefore, we can not naively use the traditional assumption of the so-called global market economy to study all the problems. We need to introduce some new economic analysis.

In terms of countermeasures, I will make three points.

1. To cope with the trade war. It happened that the meeting was closed yesterday afternoon. We also heard some good reports and speeches.

2. We should study how to maintain a more competitive market order. On the one hand, when we see distorted growth in the market, we are trying to reduce such distortions, which is to be solved by paying more attention to fair competition.

3. I agree with what President Chen Yuan said. Under such circumstances, we should pay great attention to the internationalization of the RMB. Because only after the internationalization of RMB, can we effectively resist the remarkable distortions created globally on the basis of the reserve currency of US dollar to maintain the policies of globalization, trade liberalization, investment facilitation, multilateralism and the realization of the community of human destiny that we advocate.

Thats all I want to say. Thank you.

Source: Responsible Editor of 21st Century Economic Report: Qian Juanxiao_NBJ10675