00:00Professor Zhu, thank you for joining us.
00:01Just help us understand the latest news yesterday from Pang Gongsheng
00:05about placing more emphasis on the overnight reverse ripple rate.
00:08Does this mean that it's just a technical adjustment
00:11or is it a shift towards using the overnight rate
00:14as the key policy rate in the future?
00:17I think it's a bit of both.
00:18I think we have been seeing that the PBOC is trying to use
00:21the overnight ripple rate as a more important guidance
00:25for the policy interest rate.
00:26So in a way, I think one thing is it is trying to use more
00:30of the market-based instrument to guide the market expectation
00:34of the interest rate for China going forward.
00:37The second is I think we have been seeing that the overnight ripple rate
00:39has been very important in the inter-institution lending
00:43and borrowing between China's financial institutions.
00:46So this is very important because often enough towards the end of the month
00:50there will be a spike in the interest rate squeeze
00:52and then I think this will be helping ease some of the fluctuation
00:56and the spikes in the short-term market turmoil or fluctuation.
01:02And what is the timeline?
01:04When do you think we would finally see that shift towards that overnight rate
01:07as a policy rate?
01:09Well, I think the PBOC has been pushing towards this direction
01:11for the past year or two.
01:12So I wouldn't be surprised that they will continue in that direction
01:15and hopefully probably by the end of the year
01:18I think we will see some more reliance on this
01:20rather than the LPR as the policy guidance interest rate.
01:24And you mentioned that this has been a multi-year process.
01:27Do you actually see concrete progress in terms of the sharpness
01:31of policy transmission as they shifted towards shorter end interest rates?
01:35I think we do.
01:36I think one is we are seeing the policy corridor has been narrowing
01:40which is an indication of the policy makers having greater control
01:43over the precise direction of where the market is headed.
01:46The second is I think the continuing stance or the continuing effort
01:51of trying to push into this direction
01:52is gradually changing the behaviour of the market institutions
01:56which is also going to be eventually working into the PBOC's direction.
02:00And just reading between the tea leaves from what Pang Gongsheng said yesterday,
02:04when do you think the next cut is going to be?
02:08I think probably sometime this year, but it is really highly dependent.
02:12I mean, we just see Kevin Walsh took the first press conference
02:15from the other side of the ocean.
02:17So I think it is highly dependent on the international environment
02:20and the inflation environment in the whole world.
02:23It is interesting that Pang Gongsheng indicated yesterday
02:26that credit growth has been slow
02:28and he said it is not sustainable to return to previous pays.
02:32In fact, it is unnecessary.
02:33So if we do see this structural downshift in the credit impulse,
02:37where is the growth going to come from?
02:39Well, I think China is trying to engineer its growth
02:42from the more debt-driven or credit-driven
02:45to the more technology or innovation-driven models.
02:49So I think it is going towards that direction.
02:51And somehow by design, I think this will require less credit
02:55and less lending from the financial institutions.
02:57So this is not necessarily a bad thing, as Governor Pan pointed out.
03:02So I think we are counting more on innovations such as new energy vehicles,
03:07photo voltage and AI and high-end semiconductors innovation.
03:11And I think more and more of the growth hopefully will be coming from those areas
03:15rather than the traditional lending-intensive housing sectors.
03:19And this dovetails with what the CSRC Chen Wu-Cheng talked about
03:23with the liberalizing of the rules to list these less profitable AI firms.
03:29And we did see a surge in IPO after that, right, with the reforms.
03:32But do you think the market is maybe underpricing the risk
03:36given the lack of visibility around profits?
03:38Well, I think we are living through a period of fairly available liquids
03:44all over the world.
03:46So I think this is not just a China phenomenon.
03:48This is probably as prevalent as it is in the NASDAQ and the U.S. market.
03:52So I think we are going through a period of time
03:54where people have very high hope for AI and related innovation.
03:57And also at the same time, people are willing to pay the risks
04:00for the potential fluctuations in the market eventually.
04:03So I think the jury is still out for whether we are making the right bet
04:07at the right moment.
04:10And is it going to come at the expense of Hong Kong?
04:12Because China is now encouraging Hong Kong-listed firms
04:15to list in China as well.
04:16I don't think so.
04:17I think Shanghai and Hong Kong have always been playing
04:20a fairly healthy complementary role to each other.
04:24In a way, some of the companies choose Hong Kong
04:26because Hong Kong has more flexible listing requirements
04:29and more liquidity and availability of the foreign capital
04:32on the other hand, I think China's main market, the A shares,
04:37enjoys a higher valuation and more liquidity.
04:40So in a way, it's a choice of the companies
04:43and the financial institutions in which market
04:45or which venue fits their needs the best.
04:48And we heard from the FX regulator as well
04:51about potentially looking into creating UN FX trading
04:56in the future, futures trading.
04:58What is the direct impact that you think it's going to have
05:01on corporate margins and earnings, especially the exporters?
05:04I think like many reforms going on in China
05:07or has been going on in China,
05:09I think the reform is probably going to be gradual
05:10and step by step.
05:12So in a way, I don't think we're going to see a lot of shocks
05:15or impacts to the financial institutions or corporations
05:18at the very moment.
05:20But I think the introduction of derivatives
05:22of China's FX exchange rate trading,
05:27I think that is a very healthy step
05:29for having more market participants joining the markets,
05:32setting the press through different channels.
05:34I think that's always a healthy and constructive direction
05:37for the further reform of exchange rate of RMB.
05:42And to what extent do you think this is going to draw
05:44more inflows, global inflows into the Chinese bond market,
05:48especially with the offshore UN bond futures trading
05:52that is going to be supported by the government as well?
05:54Yes, I think the offshore Chinese exchange rate
05:57and the offshore bond market is very healthy,
05:59whereas onshore in the free trade realm in Shanghai,
06:03I think that's a very innovative step for China
06:07to experiment with various possible venues
06:09and platforms to trade and determine prices
06:12for both the interest rate and the exchange rate.
06:15That being said, I think we probably need to see,
06:18as Governor Zhu pointed out,
06:21we probably need to see more reforms
06:22in the capital accounts flow
06:24and in terms of the facilitation of the setting up
06:27of entities in the free trade zone
06:31in order for foreign players to play a more active
06:34and a more continuous role
06:35in setting the prices in those markets.
06:38And is this enough, do you think,
06:40to encourage foreign investors, foreign institutions
06:42to hold the UN for the longer term
06:44as an alternative asset
06:45and not just for purely transactional purposes?
06:48I think that is probably a different topic.
06:50I think that is probably the longer term direction
06:53of the reform going forward.
06:54And I think in order to achieve that,
06:57we probably have to have one,
07:00a more vibrant economic growth in China,
07:03two, a fairly good management of the interest rate,
07:05three, is the more opening up of the capital account.
