Yi Gang and the moderator on negotiation

 Moderator: Governor Yi has just given a wonderful lecture by covering the framework of
monetary policy, the “two-pillar” framework of monetary and macro-prudential policies, as well as
the considerations about the monetary policy framework under the new normal. In particular,
Governor Yi talked about the downward pressure facing the economy since this year, and
measures we have taken, including supporting the development of private enterprises with “three
arrows”. Further, he illustrated risks in different aspects, and finally the internal and external
equilibrium. These have made the speech highly profound and comprehensive. Due to limited
time, there may be some aspects that are not elaborated on. 

Now please allow me to ask a few
The second in the three arrows you mentioned, is the support for private enterprises in bond
issuance. There is a mechanism in place to insure against credit events, and you also said that
the tool will be priced by the market. What are the institutions that issue credit risk mitigation
tools in the market, as they are supposed to be competent enough to take such responsibility
and deal with possible risks?
Yi Gang: The most important precondition for issuing credit mitigation tools is that the market
should trust the institutions that provide credit protection to insure against a credit event. At
present, this task is fulfilled by the China Bond Insurance Company (CBIC) under the National
Association of Financial Market Institutional Investors, with the support from the PBC; meanwhile,
CBIC can launch such products with principal underwriters, commercial banks and securities
companies. In addition, local governments, who know best about local enterprises, also actively
participate in the process.
Moderator: Is it supported by the PBC?

 Yi Gang: Yes. With the PBC’s support, the credit protection that CBIC provides won’t fail to be
fulfilled upon crisis as what happened to AIG, so the payment will be 100% repayable. However,
the whole process is market-based and launched with principal underwriters. For example, firms
can issue bonds worth of RMB 1 billion, and make them half insured and half not. CBIC might
insure for a scale of RMB 100–200 million among the insured bonds of RMB 500 million, principal
underwriters another RMB 100–200 million, and other organizations the rest. I heard that a new
private enterprise bond was issued today, wholly insured by the principal underwriter itself. It
12 / 15 BIS central bankers' speeches
means that this instrument created by the PBC acts as an igniter introducing market players into
the market. Once the market is restored after the introduction, the PBC will gradually step out.
When there’s no one else to issue bonds or provide such credit protection, the PBC will take the
responsibility. Besides, this mechanism is time-bound. We will automatically exit at the due time
and avoid competing with market players. We would only take actions when no one is willing to
do so.
Moderator: So, other participants also play a big part in pricing?
Yi Gang: Yes, the role they play is decisive. And the pricing is fully subject to book building and
Moderator: When principal underwriters provide credit protection, does the PBC regulate them?
For instance, to review whether the underwriters are competent enough? After they provide such
protection, is there any possibility that the underwriters come short of money and fail to repay?
Yi Gang: We have a threshold for capital. In case of a credit mitigation tool default which results
in non-payment, they are the same as the bond defaults where the defaulting party shall bear the
legal liability and proceed according to laws and bankruptcy procedures at the court. Those
principal underwriters could be banks or large securities companies with abundant capital.
Moderator: As for the other two arrows, you just elaborated the second one. To my
understanding, bond issuance is actually very important as it is an open message and important
signal for the market that the enterprises are capable of issuing bonds without difficulty, and then
the bank may follow with loans. The first arrow is to encourage banks to grant loans to private
enterprises, especially to small and medium ones. We saw the annual new high of private
enterprise bond issuance in November. How about bank loans to private enterprises? 

Is there
any improvement?
Yi Gang: This year, we paid much attention to encouraging RMB loans in macro-economic
management. In November, the RMB loans increased by RMB 1.25 trillion and the new RMB
loans from January to November exceeded RMB 15 trillion, an increase of RMB 2.14 trillion year
on year. This year also witnessed decreased shadow banking and off-balance-sheet financing
activities, particularly trust loans and entrusted loans. The important goal of macro-economic
management is to increase the on-balance-sheet RMB loans to hedge the decline of shadow
banking and off-balance-sheet financing activities. Although the loan growth in this year is not
slow, as the increase still goes slightly smaller than the decrease of off-balance-sheet activities,
we may find the monetary conditions not that loose. Market needs indeed play a part here, but it
is mainly decided by economic factors and economic cycle. When conducting counter-cyclical
adjustment, we emphasized both market-based operation and risk prevention and control, so as
to fill the financing gap in an optimal way.
By loan structure, the PBC increased the quota of central bank lending and central bank discount
by RMB 300 billion, mainly to support small and medium banks who offer loans to SMBs and
private enterprises for a large part. I’ll skip the figures that all provinces have provided in details.
Central bank lending and discount are subject to bookkeeping, so we have a clear picture of
which small and medium enterprises are beneficiaries.

Moderator: You mentioned that the third arrow is equity financing. Would you please give us
more information? As you have said, it’s under research, right?
Yi Gang: Correct. Despite the fact that it is in the research stage, this tool has taken effect,
because I’ve talked about these “three arrows” over a month ago, and market behaviors are often
guided by expectations. The first arrow has been in place all the time; and the second arrow,
namely the credit mitigation tools for bond issuance of private enterprise started to be massively
applied from October and November. The third arrow mainly tackles problems in equity financing:
in the event that private enterprises use their stocks for pledged financing, additional collateral
supplement resulting from declined stock price may, among other things, lead to the transfer of
ownership or other difficulties. Therefore, we are encouraging the market to optimize resource
allocation and mitigate the difficulties arising from additional collateral supplement. Many effective
innovative tools are created nationwide, so there are numerous ways out.
The key points to alleviate this problem include: Firstly, there must be no irresolution about
working to consolidate and develop the public sector; and there must be no irresolution about
working to encourage, support, and guide the development of the non-public sector. As we
emphasize here the current difficulties for private business, we shall resolutely support the
growth of private economy. Secondly, we shall guard against moral hazards. What are the moral
hazards? Why did I elaborate on the second arrow today? Designed by the PBC though, this tool
takes effect fully based on market-oriented resource allocation. In other words, it is designed to
insulate power from resource allocation, and thus prevent moral hazards. The introduction of
“three arrows” serves to guide expectations and local authorities are all working to adopt effective
Moderator: Governor Yi, in the speech, you mentioned the internal and external equilibrium at
the end, and before that, the uncertainties facing China’s external economic and trade relations
this year. Against these uncertainties, it might bring more challenges to us in striking a balance
between the internal and external equilibrium. As you previously stated, we shall prevent risks
from spreading among different markets. Could you please expound on this aspect? For
instance, at present there are three months for China and the US to negotiate over the trade
issues. What if the result turns out to be less satisfactory three months later? What responding
measures we have in terms of monetary policies?

 I believe we must have a pre-arranged plan,
Yi Gang: What I meant by internal and external equilibrium, is to strike a balance between
internal and external equilibrium when considering monetary policies. For example, when the
domestic economy faces downward pressure and credit crunch, the monetary conditions should
be somewhat accommodative; however, if the conditions are overly accommodative, the
excessively low interest rates will impact on the exchange rate. Therefore, the external
equilibrium shall be taken into consideration for a balance. 

The Fed is now in interest rate hike
cycle. As it approaches the neutral rate, the uncertainty about a further rate hike seems to be
greater than that a few months ago, while the rate rise prospects were very clear a year ago.
However, as our economy faces certain downward pressure and requires relatively
accommodative monetary conditions, there is a typical contradiction between the internal and
external equilibrium. In this case, we shall focus on the internal equilibrium while considering the
external one to strike a balance in between, which in fact is the optimal balance point.
As to China-US trade frictions, President Xi Jinping and President Donald Trump have held
fruitful meetings days before in Buenos Aires, Argentina and reached important consensus in this
regard. We’ll address this issue in a constructive way in line with the consensus made by two
leaders. I believe that there are huge mutual benefits and economic integration between China
and the US. A constructive solution will benefit not only China and the US, but also the global
economy. 14 / 15 BIS central bankers' speeches
Thank you!

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