Zhou Xiaochuan, governor of the People’s Bank of China (PBOC), attends a news conference in Beijing, China. (Photographer: Giulia Marchi/Bloomberg)

Nearing Term End, PBOC Chief Says China's Opening Can Be Bolder

(Bloomberg) -- People’s Bank of China Governor Zhou Xiaochuan said market access reforms should be accelerated and that the world’s second-largest economy “can be bolder in opening up.”

Policy makers are now more focused on achieving “quality” growth, rather than the pace of expansion, which means reliance on credit may ease, Zhou, 70, told a packed briefing Friday during the National People’s Congress in Beijing. He said it’s positive major economies are exiting years of easy monetary policy amid a global recovery.

“When we’re pursuing quality-oriented growth, we’ll depend less heavily on the credit-based growth model,” Zhou said, smiling often and looking confident and relaxed during the more than hour-and-a-half long appearance that may be among his last as the central bank chief.

Deputy Governor Yi Gang said stable progress will be made on capital account convertibility. State Administration of Foreign Exchange Director Pan Gongsheng said cross-border flows are stable.

Zhou has led the PBOC for 15 years, the longest tenure in the monetary authority’s history. NPC delegates will vote March 19 to appoint a central bank chief, who will face the challenge of keeping the economy growing while defusing debt risks and steering monetary policy. In recent months Zhou has capped his career as a determined advocate of financial openness, helping China’s yuan gain reserve-currency status, with warnings over mounting debt risks.

Read More: China to Name PBOC Chief March 19 as Zhou Nears Retirement

“I’ve spent so many years working in the financial system and many things have happened,” Zhou said with a touch of emotion. “It’s my honor to work with everyone to push ahead with financial reforms and opening up. I feel very honored.”

Though current bank regulatory chief Guo Shuqing and Hubei provincial party chief Jiang Chaoliang have both been tipped to replace Zhou, President Xi Jinping’s top economic policy adviser and newly-appointed Politburo member Liu He has recently been named by analysts in connection with the top monetary policy job and a vice premier position.

Zhou’s call for bold opening came just after U.S. President Donald Trump announced broad steel and aluminum tariffs and as his administration is said to be weighing clamping down on Chinese investments in the country and imposing tariffs on a broad range of its imports. While China has, for example, announced the removal of foreign-ownership limits on its financial system, much of the economy is difficult for foreign investors to enter.

“He’s repeated what he’s been saying all his career: We must finish what we started in terms of liberalizing financial markets,” said Andrew Polk, co-founder of research firm Trivium China in Beijing. “He’s probably pretty concerned. There’s been a broader backsliding on marketizing and liberalization.”

What our economists say:

As Zhou’s role as driver of financial reform and opening comes to an end, it’s unclear his successor will share his instincts, Bloomberg economists Tom Orlik, Fielding Chen and Qian Wan wrote in a note. “Zhou repeated his view that ‘reform’ and ‘stability’ are not opposing forces,” they said. “In fact, the reverse is true: by driving greater efficiency, reform is a necessary to underpin stability. We agree.”

Zhou and Yi also dove into the internals of setting policy, suggesting views on the broad M2 money supply, a long-favored indicator, are evolving. Premier Li Keqiang’s annual report to the legislature on Monday omitted the M2 target, signaling that its significance is fading. The policy document instead said it’s expected to expand at a similar pace as last year.

“M2 is no longer a very precise tool to track whether monetary policy is tight or loose,” he said, adding that factors like output growth, inflation and employment should be considered.

Zhou spoke hours after European Central Bank President Mario Draghi’s surprise dialing back of easing measures and a Bank of Japan meeting at which policy settings were left unchanged.

On financial stability, a key objective for top leaders, Zhou said China “has entered a phase of stabilizing and gradually reducing leverage.” Reforms are in the works and the PBOC will get a greater role in supervision as the government boosts regulatory coordination, he said.

As regulators weigh new rules to supervise so-called financial holding companies, which span different segments and create hidden risks, Zhou disclosed for the first time that they’ll be subject to more stringent capital requirements and be scrutinized for connected transactions.

On the currency, Zhou said the process of yuan globalization will be gradual. Its internationalization, long a goal of Beijing’s leaders, can be stepped up when capital account restrictions have been lifted, he said.

Zhou’s deputies said authorities will allow more convertibility under the capital account as cross-border flows are more balanced and that China is gradually exiting counter-cyclical management of the foreign-exchange market and capital flows.

Nearing Term End, PBOC Chief Says China's Opening Can Be Bolder

After climbing the most last year since 2008, the yuan’s rally has started to teeter as the dollar racks up gains on the back of a more hawkish outlook for the Federal Reserve.

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