As China pushes to make the international financial system more to its liking, Li Jiange is in a prime position to help shape Beijing’s strategy. The 60-year-old official helped orchestrate the reform of state-owned enterprises and the banking system in the late 1990s as a senior aide to then-Premier Zhu Rongji. Today Li, who holds the title of minister at large, oversees the country’s financial crown jewels as chairman of China International Capital Corp. and vice chairman of Central Huijin Investment, which controls the government’s stakes in big banks. He spoke recently to Institutional Investor Asia Bureau Chief Allen T. Cheng in Beijing.
Institutional Investor: In 1997, China was able to come through the Asian financial crisis and become a rudder of stability for Asia. How will China pull through this current crisis?
Li: China back then was far weaker than it is now. Two thirds of our state-owned enterprises were loss-making. Chinese banks were all in very bad shape. Today our SOEs are stronger. Our banks are much healthier.
Why were we able to successfully raise China’s position? Well, it’s because China reformed many things. When Asian economies were devaluing their currencies, China vowed that as a responsible, big nation, it would not depreciate. We knew it would cause another crisis for our neighbors. By not depreciating we helped stabilize the region.
This crisis is far more severe than the Asian financial crisis. This is a global crisis; it emanates from the U.S. Still, I believe China is far better able to cope. The government unleashed 7 trillion yuan [$1.0 trillion] worth of loans in the past year. The central bank has been issuing wise policies. Our brokerage houses are managing well. Not a single brokerage went bankrupt in this crisis.
Do you envision America and China coming out of this crisis stronger together because of their large stimulus packages?
I believe global cooperation was critical in arresting the loss of confidence. This unified approach is critical. The U.S. should continue to stimulate the economy. The Chinese government already has stated it will stimulate further whenever necessary. We can’t be conservative now. We must continue with stimulus globally, at least for now. When someone is starving, the first thing you do is to feed him; you don’t sit around trying to make a prognosis.
In light of the risk of a dollar devaluation, is China interested in buying more U.S. government debt?
I observe that the dollar appreciates in a crisis. People come to see the dollar as a safe haven. I don’t see the dollar depreciating so much, at least in the short term. The U.S. economy is No. 1 in the world and will remain No. 1 for a long time. The Chinese government has no alternative of using a replacement currency for our foreign exchange reserves. In the short to medium term, we have no choice but to continue to buy and hold U.S.-dollar assets.
If U.S. policies are more liberal, we will invest more in U.S. companies, but the Committee on Foreign Investment in the United States has rules, and they limit our investments. We wanted to buy more Morgan Stanley shares, but we were prevented from doing so. There are glass ceilings for investments by Chinese companies in the U.S. I hope people in the U.S. will stop seeing China as a threat. More Chinese investments would be good for the U.S.
What changes do you envision in the global financial architecture?
The U.S. dollar is a global reserve currency, based on historical trends. However, as the world economy continues to evolve, the U.S. is declining economically and the dollar will, over the longer term, decline in importance as a global currency as well. All nations must sit down to talk about a new currency-reserve system. It will be a longer-term thing, but we must begin the discussions now.
In the past year, China has signed currency swap agreements with more than half a dozen countries and experimental renminbi settlement trade centers. Is this a practical response to the crisis or a natural evolution of China’s increased trade relations?
The government has had a goal of making the renminbi freely convertible since 1993. We still need more time to reform, but I believe we are getting closer and closer to the day when the RMB will be convertible. Our conditions are getting better, and our system is more mature. The government is no longer so insecure about capital flight. I don’t think it will take 20 years for the RMB to be convertible, and it may be not much longer than ten years.
See related article, " China Wants to Reshape the International Financial System ”.
