Don’t Be Too Optimistic About Global Financial Risk: Ex-Chief of Chinese Central Bank

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The former head of the Chinese central bank says that measures for the prevention of financial risk are still far from complete, and warned of the need to better tackle pro-cylical factors.

Addressing the Lujiazui Forum in Shanghai on 14 June, Zhou Xiaochuan (周小川) said that global financial regulation had made major strides in the decade since the Great Financial Crisis, while the global economy had staged a “comparatively complete recovery.”

“However, we still can’t be too optimistic,” warned Zhou, who pointed to the need to recognise the existence of many “unfulfilled matters.”

“We need to seize advantageous opportunities, and advantageous opportunities will make it easier to resolve these issues.

“We must also seize [these opportunities] completely, in order to make it easier for us to ensure that there will not be another global financial crisis, or that it at least won’t be as severe.”

Zhou served as governor of the People’s Bank of China for a fifteen year period prior to his retirement in early 2018.

According to Zhou China needs to retain a “sense of urgency” when it comes to combating financial risk.

“If we do not do [what’s necessary], then we truly won’t be able to determine if the next crisis is on its way.”

Zhou highlighted in particular the contribution made by pro-cyclical factors and positive-feedback mechanisms in the financial system to the 2008 crisis.

While the establishment of macro-prudential frameworks can serve as a negative feedback mechanism, Zhou said that this method wasn’t completely effective, and that the economic system still possessed “extremely strong pro-cyclical and positive-feedback characteristics” that have yet to be resolved.

Zhou also highlighted the risk created by the enduring role of the greenback as the world’s reserve currency, creating irregular capital flows once crisis takes place in key economies.

“While everyone is well aware of this problem, and the IMF, BIS and FFSB have all organised many rounds of discussions, we have recently once again seen that this problem can in fact continue to arise.

“Everyone has recently seen irregular capital flows re-occur in Argentina, Turkey and potentially even other countries.”

Zhou pointed to the role played by national savings rates in global financial crises, as well as their close ties to ongoing trade tensions between China and the US.

He also pointed to fiscal policy as key factor contributing to financial crisis, alongside excessive dependence upon monetary policy.

“The crisis took place ten years ago, and the figures on the public debt of various countries as a share of GDP is not optimistic…so the issue of fiscal consolidation has yet to be thoroughly resolved.

“Because of problems with the fiscal policy space, excessive use of monetary policy is common…because of this excessive dependence, everyone has become accustomed to quantitative easing and a low interest rate environment, and in future we could face challenges.”

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