Zhou Xiaochuan interprets RMB exchange rate by Chinese and Western medicine Theory: Allow trial and error

The picture is central bank governor Zhou Xiaochuan. China Economic network Beijing, November 22, the central bank's website recently published Zhou Xiaochuan's speech at the opening ceremony of the finance and new Summit. In his speech, he borrowed the theory of "Traditional Chinese Medicine" and "Western medicine" to explain the RMB exchange rate. In his view, people's exchange rate adjustment has three meanings: one is to choose progressive therapy instead of radical shock therapy; the other is to not expect a single measure to play a particularly large role; third, dynamic adjustment and allow trial and error on the basis of feedback. The full text reads as follows: Ladies and gentlemen: Good afternoon. I am very happy to attend the new finance summit.　　Today, I would mainly talk about two issues. The first is about the RMB exchange rate issue. The reporters said that I told the International Monetary Fund and the World Bank's joint annual meeting in Washington recently that there were "Chinese medicine" and "Western medicine" in the study of China's exchange rate, and they wanted to verify their understanding of the problem. I found that the reporters were very understanding. First of all, I did say there is a certain theoretical and empirical basis for the treatment of Western medicine, so that a certain drug is effective, and soon after the service. Chinese medicine is to prescribe a medicine, may a pair of medicine has 10 flavor medicine, is a slightly slow treatment. Perhaps many people immediately understand whether it is a matter of rapid treatment or gradual treatment. I think this understanding is certainly the most direct and right. But there are actually two more meanings behind it.　　I'd like to take this opportunity to explain a few. First, Traditional Chinese medicine is usually a pair of medicine to have several flavors, respectively, with different functions, and together to achieve the overall effect. To ease China's balance of payments imbalance, especially trade imbalance, we need to accelerate the transformation of economic development patterns and structural adjustment, reduce dependence on external demand, expand domestic demand, especially to expand consumer demand and development of services. These measures are similar to traditional Chinese medicine, is several flavor medicine.　　The exchange rate is also one of the drugs that play an important role. Expanding domestic demand is one of the most important drugs. After the expansion of domestic demand, the proportion of exports and domestic sales will change greatly, import will also expand, the corresponding balance of payments surplus will be reduced. At the same time, labor wages will be adjusted upward, energy resources prices will further reflect the market supply and demand relationship and environmental costs. In terms of environmental costs, China used to have low prices, and with the reality of environmental costs, some manufacturing industries will feel the increase in the overall cost of social and economic. In the price mechanism, including the export tax rebate policy to grasp the problem. In general, these package policies are somewhat similar to the comprehensive treatment of Chinese medicine formulations. We hope that this comprehensive treatment is effective, and it also reflects our view that we do not individually emphasize that a particular drug is particularly efficient or that it alone can function adequately.　　This may reflect a different methodology for analyzing and solving problems. Second, traditional Chinese medicine treatment methods include a practice, that is, dynamic adjustment and trial and error. The so-called dynamic adjustment means that Chinese medicine practitioners will adjust the medicinal herbs according to the changes of the patients. Some drugs will be removed, some new drugs will be added, and the dosage will be adjusted, and some agentsThe amount will be increased and some doses will be reduced. Overall, it is based on the patient's feedback to adjust, the feedback is to observe the patient's physical condition improvement. It can be seen that this is a dynamic adjustment based on feedback. Chinese medicine may not have a complete and logical theory like Western medicine, and some aspects should rely on experience. Experience is based on experiments and statistics, in some ways may not be very accurate, but its logic can be adjusted, no use of drugs or side effects of large drugs will be canceled, or be reduced, this is a trial and error. I think this is also a way to learn from the practice, and in the process of continuous adjustment. For example, in the process of adjusting the balance of payments, we have relied heavily on the adjustment of export tax rebate. However, later found that the adjustment of export tax rebate may also have a lot of side effects, to some extent, and the principle of equal competition is inconsistent.　　After that, the dynamics and scope of the use of such measures have been dynamically adjusted, reflecting the process of continuous evolution and progress.　　In short, I use the analogy of Chinese medicine has three meanings: one is not to choose radical shock therapy, but to choose progressive therapy; second, do not expect a single measure to play a particularly large role; third, on the basis of feedback dynamic adjustment and allow trial and error. The second is about the Fed's next round of quantitative easing (QE2) and its possible impact on China. This is a hot topic now. I think since there are so many experts talking, I personally try not to say too much, nor to comment, such as which statement is right, which statement is not necessarily right. It should be said that the Fed's QE2 has been brewing for some time, the People's Bank and the Federal Reserve in a number of occasions to communicate, the BIS every two months the meeting is one of the channels. In most cases, Federal Reserve Chairman Ben Bernanke will attend in person, sometimes with the Fed's governors, and they have made quite a few of the U.S. monetary policy. In the process of communication, we feel that many statements are actually understandable. From the Fed's position, it is responsible for the U.S. economy, for creating jobs in the United States and for keeping low inflation rates at home.　　So it is understandable that the Fed adopts a loose monetary policy in the US, where the recovery is fragile, unemployment is high, inflation is low, and the US federal funds rate is close to 0 per cent. However, one of the key issues discussed in the debate is that the dollar is an international currency and the world's main reserve currency. Not only does the dollar exercise the function of the international reserve currency, but there are a considerable number of commodities, particularly commodities, that are priced and traded in dollars, and capital flows, direct investment and financial market transactions are also heavily used in the United States dollar. So the dollar has a global impact. If the QE2 policy is an optimal choice for the United States, or a better policy choice, from a global perspective, it may not necessarily be the choice of optimization, may have some side effects. This illustrates the importance of the dollar as the world's main reserve currency。 If we have a problem, we may end up with the question of whether the current international monetary system exists and whether it needs to be addressed from this perspective.　　How to interpret and analyze international currencies such as the dollar if their international roles and domestic roles collide. As to the impact on China, whether China will face more hot money inflows, China should adopt what kind of countermeasures. I think the answer is actually quite a lot of people have already talked about. I just want to add two points. First, China's current foreign exchange management system or the Capital project management system, capital projects under the irregular capital inflow or not, or must bypass. After all, we can take some management measures to prevent this kind of behavior from happening as far as possible. Second, a very important measure is to implement hedging on the total amount. In other words, if short-term speculative capital is to come in, we want to put it in a pool and hedge against it to flood into China's real economy. When it needs to retreat, we'll put it out of the pool and let it go.　　This will largely hedge against the impact of abnormal capital flows on China's macro-economy. Of course, this will cause another problem, that is, when the money comes in and out, in the process may find arbitrage opportunities, English called Arbitrage, such as the difference in interest rates, currency exchange rate changes. In this way, they are likely to gain speculative profits. Let these funds flow in to make money, we will be very unbalanced. On the one hand, we should see the importance of total control, but on the other hand, we also need to see that if there are arbitrage opportunities in this world, there will always be people doing arbitrage and almost impossible. This reminds me of something in the the late 1970s and early 80. At that time, the prices of many commodities between China and cities were inconsistent, so there appeared "property flips", who were criticized as "two-way merchants", engaged in long-distance traffic, engaged in speculation and earning the difference. This suggests that if arbitrage opportunities exist in the commodity sector, it is almost impossible to prevent people from doing so. Although people may hate this behavior emotionally, it is actually an economic opportunity and a logic of the market economy, which is inevitable. If we want to stop it, we need to consider whether there is an effective way. However, in order to control the "two-way merchants", the train will not open. In that case, the cost of the entire national economy is much greater than the cost of managing "two-way merchants".　　Therefore, the cost must be measured. There are similar developments in global financial markets, such as the more arbitrage deals we have discussed in previous years (Carry Trade). The currency at the time of the carry trade was mainly the yen, because the interest rate at the time was very low and many of the arbitrage deals were denominated in Australian and New Zealand dollars. So who is it? If we can catch the big head, or the government policy, there is a natural solution. But, it turned out that it was actually a large number of Japanese housewives doing it, and it was very difficult to stop housewives doing arbitrage. Therefore, for China, first of all, the most important thing is to maintain a basic balance of macro-economy, to guard against all kinds of risks, the hedge to hedge off. Second, as far as possible to prevent speculative acts, reduce the opportunity to get rich through arbitrage channels.　　However, we can not completely eliminate arbitrage opportunities. Therefore, if we want to comprehensively analyze the global impact of QE2 policy, we need to study from a number of perspectives. Economists have come up with a lot of research perspectives, and I'm here to add a few points. may not be speaking is not right, the next stage will also spend a lot of energy to study this issue, I hope to inspire you.　　If you are wrong, please criticize me.　　Thank you. (Responsible editor: Zhang Shaorei)