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https://www.bis.org/review/r970211c.pdf
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Mr. Chen discusses monetary relations between China and Hong Kong (Central Bank Articles and Speeches, 10 Sep 96)
|
Speech by the Deputy Governor of the People's Bank of China, Mr. Chen Yuan, at the Bank of England Seminar held in London on 10/9/96.
|
1996-09-10 00:00:00
|
Mr. Chen discusses monetary relations between China and Hong Kong
Speech by the Deputy Governor of the People's Bank of China, Mr. Chen Yuan, at the Bank of
England Seminar held in London on 10/9/96.
INTRODUCTION
In less than three hundred days, China will resume the exercise of sovereignty
over Hong Kong. Given Hong Kong's role as an international financial centre, it is natural for
the international investment community to be interested in the future of Hong Kong. I am
grateful to Governor George for giving me this opportunity to share with this distinguished
audience the Chinese Government's policy on the monetary relationship between the mainland
of China and Hong Kong after 1997.
By way of introduction, let me first explain the origin of the basic principle of
"one country, two systems", which forms the backbone of China's policy towards the Hong
Kong Special Administrative Region as from 1 July 1997. This will help people to understand
why China is so committed to implementing this very important principle in Hong Kong.
THE "ONE COUNTRY, TWO SYSTEMS" PRINCIPLE
What does "one country, two systems" mean? It means that after 1997, the
socialist system and policies shall not be practised in the Hong Kong Special Administrative
Region, and the previous capitalist system and way of life shall remain unchanged for 50 years.
This principle was not a compromise solution reached in the Sino-British
negotiations for political expedience. It was not even an idea floated by the British side. It was in
fact a paramount guiding principle adopted by the Chinese Government for advancing the
unification of China. The principle was also the outcome of intense research by the Chinese
Government on what factors contributed to the economic success and stability of Hong Kong
and how they could be preserved beyond 1997. We are convinced that this principle would serve
not only China's long-term national interest but also that of Hong Kong.
It was against this background that the Chinese Government put forward in the
negotiations the concept of "One Country, Two Systems" and the guiding principles. These were
subsequently incorporated in the Sino-British Joint Declaration in 1984 and then in the Basic
Law promulgated by our National People's Congress in 1990. I should add that the principle of
"one country, two systems" as a fundamental policy for the unification and development of
China has been written into our country's constitution and become a long-term irreversible
national policy. The Sino-British Joint Declaration is a treaty registered with the United Nations.
The Chinese Government is committed to implementing fully and faithfully the provisions of the
Joint Declaration and the Basic Law.
My second point is that notwithstanding our commitment, there is no lack of
sceptics who doubt that the Chinese Government would abide by the Basic Law and fulfil its
commitments after 1997. This brings to mind those sceptics who doubted China's commitment
to the open door policy and the economic reform which China initiated in late 1979. Such critics
thought that the problems faced by China in the reform process were so huge that we were
doomed to fail. They also doubted how our economic reform could square with China's socialist
economy. Today, you and I can both see that these critics have been proven wrong.
Between 1979 and 1995, China's GDP has increased by an average of 9.9% every
year and the standard of living has improved significantly. The economic and monetary
conditions and the legal and institutional reform of our financial sector have made progress
beyond the expectations of many. China's foreign reserves reached a record high of US$ 90.7
billion in early August 1996.
The critics are right in pointing out that China is a vast country, with a large
population of over 1.2 billion people. It is natural that in the implementation of our reform we
could run into difficulties of one sort or another. At times we need to adjust our pace a bit to
resolve those problems but there is no question that China is firmly resolved to continuing with
economic reform. Equally, China remains firmly and totally committed to maintaining the
prosperity and stability of Hong Kong, in accordance with the provisions of the Joint
Declaration and the Basic Law. I am sure that the facts and events will demonstrate that the
sceptics will once again be proven to be wrong.
Ladies and gentlemen, let me now proceed to outline first the legal and policy
framework and then the seven basic principles governing the monetary relationship between the
mainland of China and Hong Kong. Finally, I will describe China's policy on Hong Kong's
participation in international and regional financial institutions and forums.
THE LEGAL AND POLICY FRAMEWORK
According to the Joint Declaration and the Basic Law, Hong Kong will enjoy
autonomy in all areas other than foreign affairs and defence matters. The key provisions on the
monetary and financial sides provide that:
The Government of the Hong Kong Special Administrative Region shall provide
an appropriate economic and legal environment for the maintenance of its status as an
international financial centre. Hong Kong shall, on its own, formulate monetary and financial
policies, safeguard the free operation of financial business and financial markets, and regulate
and supervise financial activities in accordance with the law.
The Hong Kong dollar, as the only legal tender in Hong Kong, shall continue to
circulate, and the existing currency issue mechanism shall continue. The Hong Kong dollar shall
remain freely convertible, with free flow of capital and no exchange controls. The Exchange
Fund, which holds Hong Kong's foreign reserves, shall be managed and controlled by the
Government of the Hong Kong Special Administrative Region, primarily for regulating the
exchange value of the Hong Kong dollar.
The above provisions form the foundation for defining and establishing the
monetary relationship between the mainland and Hong Kong under the principle of "one
country, two systems". Under these provisions, this relationship can be best summarised as one
country, two currencies, two monetary systems and two monetary authorities, under two
different social and economic systems within a sovereign state.
SEVEN PRINCIPLES GOVERNING THE MONETARY RELATIONSHIP BETWEEN THE
MAINLAND AND HONG KONG
I will now set out the seven principles governing the monetary relationship
between the mainland of China and Hong Kong.
The first principle concerns the relationship between the two currencies and
between the two monetary systems.
According to the Basic Law, Hong Kong will continue to maintain its own system
of currency issuance and management after 1997. The Hong Kong dollar and the renminbi will
circulate as legal tender in Hong Kong and the mainland respectively. The Hong Kong dollar
will be treated as a foreign currency in the mainland. Likewise, the renminbi will be treated as a
foreign currency in Hong Kong.
The three note-issuing banks in Hong Kong will continue to issue Hong Kong
dollar bank notes, with 100% backing by US dollars under the linked exchange rate system. The
currency in circulation in Hong Kong is in fact backed over five times by foreign reserves. Here
I would like to stress that China supports Hong Kong's commitment to the maintenance of the
linked exchange rate system, which has served Hong Kong well by providing monetary stability
since its introduction in 1983.
Corresponding to the two currencies will be two monetary systems. They possess
their own characteristics, reflecting the differences between the two economies. The two
monetary systems are of equal importance to China in its reform and liberalisation. One does not
precede or be subsidiary to the other. They will operate in a mutually independent manner.
The second principle relates to the relationship between the two monetary
authorities. It follows from the two mutually independent monetary systems of the mainland and
Hong Kong that the two monetary authorities will also be mutually independent. The Hong
Kong Monetary Authority will be accountable solely to the Hong Kong government. The
People's Bank of China will not take the place of the Hong Kong Monetary Authority and will
not set up any office there.
As Hong Kong and the mainland develop increasingly close economic ties in both
trade and investment, close co-operation between the two monetary authorities becomes even
more important. The two monetary authorities must, therefore, strengthen further the present
sound co-operation of central banking functions, including monetary management, banking
supervision and the development of the financial infrastructure.
The third principle concerns co-operation in prudential supervision. According to
the Basic Law, the Hong Kong government will continue to supervise financial institutions in
Hong Kong, including financial institutions from the mainland. Supervision will continue to be
undertaken in accordance with international rules and practices.
Notwithstanding different business practices in the mainland and Hong Kong, we
have reached consensus on licensing procedures and supervision of each other's financial
institutions. It has been agreed that :
Financial institutions based in the mainland and Hong Kong setting up offices in
each other's territory shall be approved on the same basis as foreign financial institutions. The
mainland offices of Hong Kong-based financial institutions shall continue to enjoy the same
preferential treatment in the mainland as other foreign financial institutions. mainland financial
institutions in Hong Kong shall not enjoy any privileges. They shall abide by the law of Hong
Kong and be regulated by the relevant supervisory authorities in Hong Kong.
This arm's length treatment will certainly help to underscore the implementation
of the "one country, two systems" principle.
The fourth principle is that the People's Bank of China will support the currency
stability of Hong Kong. On behalf of the PBOC, I have early this year signed a bilateral
agreement with the HKMA on the repurchase of US treasury paper. We are prepared to offer
liquidity support to the HKMA for the purpose of stabilising the exchange rate of the Hong
Kong dollar. We also stand ready to use our foreign reserves to support the Hong Kong dollar, if
necessary.
However, I must point out that under no circumstances will China draw on or
resort to Hong Kong's Exchange Fund or other assets in any way and for any reason. I
mentioned earlier that the Basic Law states that the Exchange Fund shall be managed and
controlled by the Hong Kong government. It is also stated that the financial revenues of the
Hong Kong Special Administrative Region shall be used exclusively for its own purposes. In
addition, the Basic Law stipulates that the Chinese Government shall not levy taxes in Hong
Kong. These triple safeguards are evidence that China does not have its eyes on siphoning off
the resources of Hong Kong.
The fifth principle relates to the treatment of financial business between China
and Hong Kong. After 1997, all financial business between the two places will be conducted in
accordance with the rules and practices of international financial activities. Claims and liabilities
between banks and companies from the mainland and those in Hong Kong will continue to be
regarded as external claims and liabilities. When raising funds in Hong Kong, Chinese entities
will have equal treatment as other international and local market participants, without any
special privileges. Disputes relating to contracts between banks and companies of the mainland
and those of Hong Kong shall be handled in accordance with international practice. Where
China's Arbitration Law and other relevant laws and regulations are applied, the provisions
relating to arbitration involving foreign parties will apply.
The sixth principle is about the standing of mainland financial institutions in
Hong Kong. As discussed earlier, mainland financial institutions in Hong Kong must abide by
the law of Hong Kong and be regulated by relevant regulatory authorities there. I would like to
stress that the Bank of China group, though being one of the three note-issuing banks and a
leading commercial bank in Hong Kong, shall not be treated more favourably than other banks.
It shall not carry out any activities beyond the role of a commercial bank.
The seventh principle is on the complementarity between Shanghai and Hong
Kong. As you know, Shanghai used to be China's financial centre. With China's deepening
reforms and open-door policy, Shanghai is becoming a vibrant city with tremendous potential
for further development. To a certain extent, Shanghai has met the conditions for reviving
herself as a financial centre. While there are concerns as to whether Shanghai will replace Hong
Kong, I would like to emphasise that these are groundless speculations because the Basic Law
has already stipulated that Hong Kong shall maintain its status as an international financial
centre.
We are of the view that Hong Kong and Shanghai will have a complementary and
mutually reinforcing relationship. In the short run, and at least before the renminbi becomes
fully convertible, it will not be possible for Shanghai to become an international financial centre.
Given the size of China's economy, there is plenty of room for more than one financial centre.
Hong Kong and Shanghai will likely become two complementary and mutually reinforcing
financial centres that will each develop with its own characteristics.
HONG KONG IN INTERNATIONAL MONETARY RELATIONS
Apart from these seven principles, it is also important for Hong Kong as an
international financial centre to continue to develop its international monetary relations and
participate in the activities of international and regional financial institutions, central bank
forums etc.
There are therefore provisions in the Joint Declaration and the Basic Law that
Hong Kong may, on its own, maintain and develop financial relations and conclude and
implement agreements with other countries, regions and relevant international organisations,
using the name of "Hong Kong, China".
Some international financial organisations restrict their membership to sovereign
states. In those cases, where negotiations are held on matters involving Hong Kong, the Chinese
Government would normally consult Hong Kong and include its representatives in the Chinese
delegation. When entering into international financial agreements which may involve Hong
Kong, the Chinese government will first seek the views of Hong Kong before deciding whether
such agreements will apply to it.
Taken together, these provisions will enable Hong Kong to continue and also
develop its current international monetary relationship.
PROSPECTS FOR HONG KONG AFTER 1997
I believe Hong Kong will remain prosperous and stable after 1997. Why? This is
because:
First, the strong economic fundamentals of Hong Kong and the entrepreneurial
and management skills of the people of Hong Kong are the basis for its continued prosperity and
stability.
Secondly, the Basic Law has provided a legal safeguard for the maintenance of
the prosperity and stability of Hong Kong.
Thirdly, the economic development of the mainland has created excellent
conditions for Hong Kong's continued prosperity and stability. As pointed out by China's
VicePremier Zhu Rongji at his meeting on 29 May this year with senior officials of four main
financial regulators and institutions from Hong Kong including the Hong Kong Monetary
Authority - China is confident in Hong Kong's maintaining prosperity and stability and its status
as an international financial centre after 1997 because we have full confidence in the economic
development of China.
As Hong Kong will continue its role as an international financial centre, it will
become the most important funding centre for China and very likely for the Asian region as a
whole. With the ongoing reform and open-door policy, the mainland of China has achieved
sustained and strong economic growth. Our target for economic growth in 1996 is 8% but it
could exceed 9%. Inflation should be within the range of 7 to 8% for 1996.
The mainland of China's growth will obviously benefit Hong Kong's economy
tremendously as we are its largest trading partner. The mainland of China is also one of the
leading investors in Hong Kong, with total investment reaching US$ 25 billion last year. At the
same time, Hong Kong has also contributed greatly to the mainland of China's reform and
modernisation, both in terms of investment and know-how. Hong Kong is the largest investor in
the mainland. Total cumulative direct investment from Hong Kong has now reached US$ 78.6
billion, accounting for 58% of total foreign direct investment. In 1995 alone, about half of the
foreign direct investment in the mainland came from Hong Kong, which amounted to some US$
20 billion. Also, for the 23 Chinese companies listed on overseas stock markets, the trading of
such overseas stocks is most active in Hong Kong. Out of the 23 companies, 21 had their
primary listing in Hong Kong.
As China continues with its financial and economic reforms, Hong Kong's role as
a financial centre for China will become even more important. It is therefore vital that Hong
Kong remain the vibrant financial centre with its own economic system that we know now. We
certainly would not do anything which would jeopardise Hong Kong's prospects.
To conclude, I have no doubt that Hong Kong will continue to do well after 1997 as it has done
in the past three decades during which Hong Kong survived numerous shocks and market
turbulence. History has shown that Hong Kong has been extremely resilient to external shocks
and was able to regain its vitality and competitiveness through swift internal adjustments.
Investors who had the foresight and wisdom of capitalising on the opportunities in Hong Kong
have done well and will be able to continue to share in the prosperity of Hong Kong.
Ladies and gentlemen, 1997 is not a time when Hong Kong will need a miracle in
order to survive the transition. I hope you will also come to the conclusion that China,
particularly Hong Kong, offers tremendous business potential for investors, both local and
overseas.
|
["mr. chen discusses monetary relations between china and hong kong speech by the deputy governor of the people's bank of china, mr. chen yuan, at the bank of england seminar held in london on 10/9/96.", 'introduction in less than three hundred days, china will resume the exercise of sovereignty over hong kong.', "given hong kong's role as an international financial centre, it is natural for the international investment community to be interested in the future of hong kong.", 'i am grateful to governor george for giving me this opportunity to share with this distinguished audience the chinese government\'s policy on the monetary relationship between the mainland of china and hong kong after 1997. by way of introduction, let me first explain the origin of the basic principle of "one country, two systems", which forms the backbone of china\'s policy towards the hong kong special administrative region as from 1 july 1997. this will help people to understand why china is so committed to implementing this very important principle in hong kong.', 'the "one country, two systems" principle what does "one country, two systems" mean?', 'it means that after 1997, the socialist system and policies shall not be practised in the hong kong special administrative region, and the previous capitalist system and way of life shall remain unchanged for 50 years.', 'this principle was not a compromise solution reached in the sino-british negotiations for political expedience.', 'it was not even an idea floated by the british side.', 'it was in fact a paramount guiding principle adopted by the chinese government for advancing the unification of china.', "the principle was also the outcome of intense research by the chinese government on what factors contributed to the economic success and stability of hong kong and how they could be preserved beyond 1997. we are convinced that this principle would serve not only china's long-term national interest but also that of hong kong.", 'it was against this background that the chinese government put forward in the negotiations the concept of "one country, two systems" and the guiding principles.', 'these were subsequently incorporated in the sino-british joint declaration in 1984 and then in the basic law promulgated by our national people\'s congress in 1990. i should add that the principle of "one country, two systems" as a fundamental policy for the unification and development of china has been written into our country\'s constitution and become a long-term irreversible national policy.', 'the sino-british joint declaration is a treaty registered with the united nations.', 'the chinese government is committed to implementing fully and faithfully the provisions of the joint declaration and the basic law.', "my second point is that notwithstanding our commitment, there is no lack of sceptics who doubt that the chinese government would abide by the basic law and fulfil its commitments after 1997. this brings to mind those sceptics who doubted china's commitment to the open door policy and the economic reform which china initiated in late 1979. such critics thought that the problems faced by china in the reform process were so huge that we were doomed to fail.", "they also doubted how our economic reform could square with china's socialist economy.", 'today, you and i can both see that these critics have been proven wrong.', "between 1979 and 1995, china's gdp has increased by an average of 9.9% every year and the standard of living has improved significantly.", 'the economic and monetary conditions and the legal and institutional reform of our financial sector have made progress beyond the expectations of many.', "china's foreign reserves reached a record high of us$ 90.7 billion in early august 1996. the critics are right in pointing out that china is a vast country, with a large population of over 1.2 billion people.", 'it is natural that in the implementation of our reform we could run into difficulties of one sort or another.', 'at times we need to adjust our pace a bit to resolve those problems but there is no question that china is firmly resolved to continuing with economic reform.', 'equally, china remains firmly and totally committed to maintaining the prosperity and stability of hong kong, in accordance with the provisions of the joint declaration and the basic law.', 'i am sure that the facts and events will demonstrate that the sceptics will once again be proven to be wrong.', 'ladies and gentlemen, let me now proceed to outline first the legal and policy framework and then the seven basic principles governing the monetary relationship between the mainland of china and hong kong.', "finally, i will describe china's policy on hong kong's participation in international and regional financial institutions and forums.", 'the legal and policy framework according to the joint declaration and the basic law, hong kong will enjoy autonomy in all areas other than foreign affairs and defence matters.', 'the key provisions on the monetary and financial sides provide that: the government of the hong kong special administrative region shall provide an appropriate economic and legal environment for the maintenance of its status as an international financial centre.', 'hong kong shall, on its own, formulate monetary and financial policies, safeguard the free operation of financial business and financial markets, and regulate and supervise financial activities in accordance with the law.', 'the hong kong dollar, as the only legal tender in hong kong, shall continue to circulate, and the existing currency issue mechanism shall continue.', 'the hong kong dollar shall remain freely convertible, with free flow of capital and no exchange controls.', "the exchange fund, which holds hong kong's foreign reserves, shall be managed and controlled by the government of the hong kong special administrative region, primarily for regulating the exchange value of the hong kong dollar.", 'the above provisions form the foundation for defining and establishing the monetary relationship between the mainland and hong kong under the principle of "one country, two systems".', 'under these provisions, this relationship can be best summarised as one country, two currencies, two monetary systems and two monetary authorities, under two different social and economic systems within a sovereign state.', 'seven principles governing the monetary relationship between the mainland and hong kong i will now set out the seven principles governing the monetary relationship between the mainland of china and hong kong.', 'the first principle concerns the relationship between the two currencies and between the two monetary systems.', 'according to the basic law, hong kong will continue to maintain its own system of currency issuance and management after 1997. the hong kong dollar and the renminbi will circulate as legal tender in hong kong and the mainland respectively.', 'the hong kong dollar will be treated as a foreign currency in the mainland.', 'likewise, the renminbi will be treated as a foreign currency in hong kong.', 'the three note-issuing banks in hong kong will continue to issue hong kong dollar bank notes, with 100% backing by us dollars under the linked exchange rate system.', 'the currency in circulation in hong kong is in fact backed over five times by foreign reserves.', "here i would like to stress that china supports hong kong's commitment to the maintenance of the linked exchange rate system, which has served hong kong well by providing monetary stability since its introduction in 1983. corresponding to the two currencies will be two monetary systems.", 'they possess their own characteristics, reflecting the differences between the two economies.', 'the two monetary systems are of equal importance to china in its reform and liberalisation.', 'one does not precede or be subsidiary to the other.', 'they will operate in a mutually independent manner.', 'the second principle relates to the relationship between the two monetary authorities.', 'it follows from the two mutually independent monetary systems of the mainland and hong kong that the two monetary authorities will also be mutually independent.', 'the hong kong monetary authority will be accountable solely to the hong kong government.', "the people's bank of china will not take the place of the hong kong monetary authority and will not set up any office there.", 'as hong kong and the mainland develop increasingly close economic ties in both trade and investment, close co-operation between the two monetary authorities becomes even more important.', 'the two monetary authorities must, therefore, strengthen further the present sound co-operation of central banking functions, including monetary management, banking supervision and the development of the financial infrastructure.', 'the third principle concerns co-operation in prudential supervision.', 'according to the basic law, the hong kong government will continue to supervise financial institutions in hong kong, including financial institutions from the mainland.', 'supervision will continue to be undertaken in accordance with international rules and practices.', "notwithstanding different business practices in the mainland and hong kong, we have reached consensus on licensing procedures and supervision of each other's financial institutions.", "it has been agreed that : financial institutions based in the mainland and hong kong setting up offices in each other's territory shall be approved on the same basis as foreign financial institutions.", 'the mainland offices of hong kong-based financial institutions shall continue to enjoy the same preferential treatment in the mainland as other foreign financial institutions.', 'mainland financial institutions in hong kong shall not enjoy any privileges.', 'they shall abide by the law of hong kong and be regulated by the relevant supervisory authorities in hong kong.', 'this arm\'s length treatment will certainly help to underscore the implementation of the "one country, two systems" principle.', "the fourth principle is that the people's bank of china will support the currency stability of hong kong.", 'on behalf of the pboc, i have early this year signed a bilateral agreement with the hkma on the repurchase of us treasury paper.', 'we are prepared to offer liquidity support to the hkma for the purpose of stabilising the exchange rate of the hong kong dollar.', 'we also stand ready to use our foreign reserves to support the hong kong dollar, if necessary.', "however, i must point out that under no circumstances will china draw on or resort to hong kong's exchange fund or other assets in any way and for any reason.", 'i mentioned earlier that the basic law states that the exchange fund shall be managed and controlled by the hong kong government.', 'it is also stated that the financial revenues of the hong kong special administrative region shall be used exclusively for its own purposes.', 'in addition, the basic law stipulates that the chinese government shall not levy taxes in hong kong.', 'these triple safeguards are evidence that china does not have its eyes on siphoning off the resources of hong kong.', 'the fifth principle relates to the treatment of financial business between china and hong kong.', 'after 1997, all financial business between the two places will be conducted in accordance with the rules and practices of international financial activities.', 'claims and liabilities between banks and companies from the mainland and those in hong kong will continue to be regarded as external claims and liabilities.', 'when raising funds in hong kong, chinese entities will have equal treatment as other international and local market participants, without any special privileges.', 'disputes relating to contracts between banks and companies of the mainland and those of hong kong shall be handled in accordance with international practice.', "where china's arbitration law and other relevant laws and regulations are applied, the provisions relating to arbitration involving foreign parties will apply.", 'the sixth principle is about the standing of mainland financial institutions in hong kong.', 'as discussed earlier, mainland financial institutions in hong kong must abide by the law of hong kong and be regulated by relevant regulatory authorities there.', 'i would like to stress that the bank of china group, though being one of the three note-issuing banks and a leading commercial bank in hong kong, shall not be treated more favourably than other banks.', 'it shall not carry out any activities beyond the role of a commercial bank.', 'the seventh principle is on the complementarity between shanghai and hong kong.', "as you know, shanghai used to be china's financial centre.", "with china's deepening reforms and open-door policy, shanghai is becoming a vibrant city with tremendous potential for further development.", 'to a certain extent, shanghai has met the conditions for reviving herself as a financial centre.', 'while there are concerns as to whether shanghai will replace hong kong, i would like to emphasise that these are groundless speculations because the basic law has already stipulated that hong kong shall maintain its status as an international financial centre.', 'we are of the view that hong kong and shanghai will have a complementary and mutually reinforcing relationship.', 'in the short run, and at least before the renminbi becomes fully convertible, it will not be possible for shanghai to become an international financial centre.', "given the size of china's economy, there is plenty of room for more than one financial centre.", 'hong kong and shanghai will likely become two complementary and mutually reinforcing financial centres that will each develop with its own characteristics.', 'hong kong in international monetary relations apart from these seven principles, it is also important for hong kong as an international financial centre to continue to develop its international monetary relations and participate in the activities of international and regional financial institutions, central bank forums etc.', 'there are therefore provisions in the joint declaration and the basic law that hong kong may, on its own, maintain and develop financial relations and conclude and implement agreements with other countries, regions and relevant international organisations, using the name of "hong kong, china".', 'some international financial organisations restrict their membership to sovereign states.', 'in those cases, where negotiations are held on matters involving hong kong, the chinese government would normally consult hong kong and include its representatives in the chinese delegation.', 'when entering into international financial agreements which may involve hong kong, the chinese government will first seek the views of hong kong before deciding whether such agreements will apply to it.', 'taken together, these provisions will enable hong kong to continue and also develop its current international monetary relationship.', 'prospects for hong kong after 1997 i believe hong kong will remain prosperous and stable after 1997. why?', 'this is because: first, the strong economic fundamentals of hong kong and the entrepreneurial and management skills of the people of hong kong are the basis for its continued prosperity and stability.', 'secondly, the basic law has provided a legal safeguard for the maintenance of the prosperity and stability of hong kong.', "thirdly, the economic development of the mainland has created excellent conditions for hong kong's continued prosperity and stability.", "as pointed out by china's vicepremier zhu rongji at his meeting on 29 may this year with senior officials of four main financial regulators and institutions from hong kong including the hong kong monetary authority - china is confident in hong kong's maintaining prosperity and stability and its status as an international financial centre after 1997 because we have full confidence in the economic development of china.", 'as hong kong will continue its role as an international financial centre, it will become the most important funding centre for china and very likely for the asian region as a whole.', 'with the ongoing reform and open-door policy, the mainland of china has achieved sustained and strong economic growth.', 'our target for economic growth in 1996 is 8% but it could exceed 9%.', "inflation should be within the range of 7 to 8% for 1996. the mainland of china's growth will obviously benefit hong kong's economy tremendously as we are its largest trading partner.", 'the mainland of china is also one of the leading investors in hong kong, with total investment reaching us$ 25 billion last year.', "at the same time, hong kong has also contributed greatly to the mainland of china's reform and modernisation, both in terms of investment and know-how.", 'hong kong is the largest investor in the mainland.', 'total cumulative direct investment from hong kong has now reached us$ 78.6 billion, accounting for 58% of total foreign direct investment.', 'in 1995 alone, about half of the foreign direct investment in the mainland came from hong kong, which amounted to some us$ 20 billion.', 'also, for the 23 chinese companies listed on overseas stock markets, the trading of such overseas stocks is most active in hong kong.', 'out of the 23 companies, 21 had their primary listing in hong kong.', "as china continues with its financial and economic reforms, hong kong's role as a financial centre for china will become even more important.", 'it is therefore vital that hong kong remain the vibrant financial centre with its own economic system that we know now.', "we certainly would not do anything which would jeopardise hong kong's prospects.", 'to conclude, i have no doubt that hong kong will continue to do well after 1997 as it has done in the past three decades during which hong kong survived numerous shocks and market turbulence.', 'history has shown that hong kong has been extremely resilient to external shocks and was able to regain its vitality and competitiveness through swift internal adjustments.', 'investors who had the foresight and wisdom of capitalising on the opportunities in hong kong have done well and will be able to continue to share in the prosperity of hong kong.', 'ladies and gentlemen, 1997 is not a time when hong kong will need a miracle in order to survive the transition.', 'i hope you will also come to the conclusion that china, particularly hong kong, offers tremendous business potential for investors, both local and overseas.']
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Chen Yuan
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People's Bank of China
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Deputy Governor
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China
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https://www.bis.org/review/r970211b.pdf
|
Mr. Dai looks at the possibilities of strengthening financial co-operation between China and Hong Kong in order to promote economic prosperity and stability (Central Bank Articles and Speeches, 13 Nov 96)
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Speech by the Governor of the People's Bank of China, Mr. Dai Xianglong, at the Hong Kong Association of Banks' Dinner on 13/11/96.
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1996-11-13 00:00:00
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Mr. Dai looks at the possibilities of strengthening financial co-operation
between China and Hong Kong in order to promote economic prosperity and stability
Speech by the Governor of the People's Bank of China, Mr. Dai Xianglong, at the Hong Kong
Association of Banks' Dinner on 13/11/96.
I would like to thank the Hong Kong Association of Banks for inviting me to Hong
Kong to meet with you and to attend this dinner function. Although this is my first visit to Hong
Kong since taking up my post in the central bank, we follow closely the economic developments
of Hong Kong. All of you have contributed to the prosperity of Hong Kong. I greatly appreciate
the wisdom and the spirit of the people of Hong Kong. They are industrious and always striving
for the better. Hong Kong's success is partly attributable to the characteristics of its people. We
have good reasons to believe that through our joint efforts, Hong Kong will have an even better
future.
I would like to take this opportunity to give a brief description of the current
situation of the economic and financial reforms in the mainland as well as the basic principles and
policies towards the financial relationship between China and Hong Kong after 1997. In addition,
I would also say something on co-operation and joint development between the financial sectors
of China and Hong Kong.
I. Mainland China's economy is experiencing a stable development
First of all, I would like to talk about the financial and economic conditions of
China which is a hot topic for discussion among professionals from the Hong Kong financial
sector. This is because Hong Kong's future is closely linked with the economic and financial
developments of China.
China's economy began to pick up in 1992 with a dynamic national economy.
However, there was also hyper-inflation. During the latter half of 1993, the Chinese Government
began to adopt an appropriately tight monetary policy. The adoption of this policy means firstly,
price increases should be kept at a level lower than the rate of economic growth. Secondly, the
growth of money supply should be slightly above the sum of the rate of economic growth and the
target rate of the price increase. Thirdly, indirect monetary instruments should be used more
frequently for relating money supply so that the economy will not be too volatile. Our efforts in
the past three years are beginning to pay off. We have successfully curbed inflation by making
macro-economic adjustments.
Firstly, the growth of the money supply has slowed down. It is expected that the
total money supply at the end of this year will be 26% higher than the previous year. This growth
rate is 3.7% lower than the average annual growth rate during the period under the "Eighth
FiveYear Plan".
Secondly, price increases have slackened noticeably. During the period from
January to October, retail prices have risen by 6.4% as compared to the same period last year. It is
expected that the growth rate for the whole year will be around 6.5%.
Thirdly, the economy continues to grow at a relatively high rate. During the period
from January to September, GDP rose by 9.6%. It is anticipated that the annual growth rate will
exceed 9.5%.
Fourthly, our foreign reserves continue to grow. As at the end of October, our
foreign reserves reached US$ 98.8 billion. We are certain that our reserves will exceed US$ 100
billion by the end of the year. The trade surplus is estimated to be over US$ 100 billion this year.
There is also US$ 40 billion of foreign direct investment. The supply of foreign exchange exceeds
demand and the exchange rate of the renminbi remains stable. Moreover, the renminbi has
become fully convertible in the current account. Our experience proves that we are right in
adopting an appropriately tight financial and economic policy. Our ability in performing
macro-economic operations has improved greatly and our achievements are recognised
internationally.
Despite the foregoing, several major problems remain to be solved. The percentage
of financial revenues in GDP is still falling. The asset quality of banks still needs to be improved.
The basic elements of the agricultural sector remain relatively weak and it is unlikely to have any
improvement in the operational efficiency of state-owned enterprises in the short run.
In view of the current economic situation, the focus of economic and financial
reforms in the coming year will be placed on promoting the reform of the economic system and
changing the pattern of economic growth. We will continue to adopt an appropriately tight
financial and monetary policy. Further efforts will be made to adjust the structure of the economy
so as to foster new areas of economic growth. In order to ensure steady growth of the national
economy, efforts will also be made to develop domestic as well as overseas markets. Based on the
above considerations, it is desirable that next year's target annual GNP growth rate should be set
at 8-9% while the retail price increase be contained at a level below 6%. In order to achieve these
targets, the People's Bank of China is prepared to:
1. Control money supply. Our preliminary proposal is to contain the increase of
next year's total money supply (M2) within the range of 23% to 25%.
2. Adjust the credit structure. The total amount of loans to the agricultural sector
will be increased. Economic integration and the setting up of conglomerates will be encouraged.
Efforts will also be made to promote the development and sale of residential property.
3. Conduct monetary operations. Employ more frequently monetary policy
instruments such as interest rate policy, reserve requirements and open market operations to
regulate the money supply.
4. Deepen financial reforms. Reforms of state banks should be stepped up. New
commercial banks will be set up. The policy of transforming rural credit co-operatives into
co-operative financial institutions will be maintained. Direct financing will be developed in a
prudent way with better management. In addition, the financial sector will continue to open up.
5. Foster risk management. Continue the rationalisation of financial order and
prevent and eliminate financial risks.
It is envisaged that China's economy and society will continue to develop steadily
in the coming years and objectives embodied in the "Ninth Five-Year Plan" can be achieved.
China will enter the 21st century with a dynamic economy and society.
II. Basic principles and policies governing the financial relationship between mainland China and
Hong Kong after 1997
As China and Hong Kong have different currencies and financial systems, people
from Hong Kong as well as the international community are very much concerned with how the
principle of "one country, two systems" can be implemented as regards financial issues. It is
because the implementation of this principle has direct bearings on the prosperity and stability of
Hong Kong as well as the status of Hong Kong as an international financial centre.
"The Basic Law of the Hong Kong Special Administrative Region of the People's
Republic of China" lays down specific provisions relating to Hong Kong's status as an
international financial centre, its monetary and financial policies, the status of the Hong Kong
dollar and the issuing arrangements, capital flows and the role of the Exchange Fund. Our national
leaders have reiterated on different occasions that the People's Bank of China, which is the central
bank of the People's Republic of China, should insist on implementing the "Basic Law" and the
principle of "one country, two systems". We should also protect the financial relationship between
Hong Kong and the mainland which can be summarised as "one country, two currencies, two
monetary systems and two monetary authorities" within a sovereign state and deal with issues
relating to this relationship in an appropriate manner.
At the IMF/World Bank Annual Meeting which was held in late September this
year, I stated in my speech our principles governing the financial relationship between the
mainland and Hong Kong. Mr Chen Yuan, the Deputy Governor of the People's Bank of China,
also presented these principles in a systematic manner at the Bank of England seminar which was
held in September this year. Both the People's Bank of China and the Hong Kong Monetary
Authority (HKMA) have been offered membership in the Bank for International Settlements. This
is a clear demonstration of the above principles and shows that the mutually independent financial
relationship between the mainland and Hong Kong are widely accepted by international financial
organisations.
Now I am going to give an outline of the main issues relating to the financial
relationship between the mainland and Hong Kong after 1997.
Hong Kong will continue to maintain its own system of currency issuance and
management after 1997. The Hong Kong dollar and the renminbi will circulate as legal tender in
Hong Kong and the mainland respectively. Hong Kong's existing note-issuing arrangements will
remain unchanged. Moreover, China supports Hong Kong's commitment to the maintenance of
the linked exchange rate system.
It follows from the two mutually independent monetary systems of the mainland
and Hong Kong that the two monetary authorities, i.e. the People's Bank of China and the
HKMA, will also be mutually independent. The HKMA will be accountable solely to the Hong
Kong Government. The People's Bank of China will not take the place of the HKMA and will not
set up any office in Hong Kong. The People's Bank of China will strengthen further its present
sound co-operation with the HKMA. The HKMA has made great contributions to the stability of
the local currency and the supervision of financial institutions. Such efforts by the HKMA help
promote the prosperity and smooth transition of Hong Kong.
The Hong Kong Government will continue to supervise local financial institutions.
The supervision will continue to be undertaken in accordance with Hong Kong's laws and
international rules and practices. mainland financial institutions in Hong Kong shall not enjoy any
privileges. They shall be regulated by the relevant supervisory authorities in Hong Kong.
The Exchange Fund of Hong Kong shall be managed and controlled by the Hong
Kong Government. The financial revenues of the Hong Kong Special Administrative Region shall
be used exclusively for its own purposes and the Chinese Government shall not levy taxes in
Hong Kong. Moreover, China will not draw on or resort to Hong Kong's Exchange Fund or other
assets in any way and for any reason.
All financial transactions between the mainland and Hong Kong will be conducted
in accordance with the rules and practices of international financial activities. Claims and
liabilities between institutions from the mainland and those from Hong Kong will continue to be
regarded as external claims and liabilities. When participating in the Hong Kong market, Chinese
entities will have equal treatment as other international and local market participants.
Apart from the above, it is also important for Hong Kong as an international
financial centre to continue to develop its international monetary relations and participate in the
activities of international and regional financial institutions. There are therefore provisions in the
Joint Declaration and the Basic Law that Hong Kong may, on its own, maintain and develop
financial relations with other countries, regions and relevant international organisations after
1997. The 1997 World Bank/IMF Annual Meeting will be held in Hong Kong just a few months
after China resumes the exercise of sovereignty over Hong Kong. This is a magnificent financial
event and I am confident that it will be successful.
III The strengthening of financial co-operation and the promotion of economic prosperity and
stability between the mainland and Hong Kong
Mainland China and Hong Kong have close financial links with each other. Since
the implementation of financial reforms and the open-door policy, such links have been
strengthened further. It is necessary to further enhance such a mutually beneficial relationship
between the two places.
First of all, the mainland and Hong Kong should work together for the prosperity,
stability and smooth transition of Hong Kong. China's commitment to the implementation of the
"one country, two systems" principle is increasingly accepted and appreciated by the people of
Hong Kong and the international community. Worries and doubts about the future of Hong Kong
which emerged in the early 1980's have largely subsided. We are pleased to note that the financial
situation in Hong Kong is heading towards a smooth transition. We are confident that Hong Kong
will enjoy financial stability before and after 1997. Even though there may be some fluctuations
in Hong Kong's financial market, we believe that the HKMA is fully capable of handling these
situations satisfactorily. If necessary, the People's Bank of China will, at the request of the
HKMA and in accordance with the Basic Law and market practices, offer support to the HKMA.
Financial stability in Hong Kong before and after 1997 is not only essential to the prosperity of
Hong Kong and China but also to financial stability in the Asia-Pacific Region. We are confident
that the international financial community, including the central banks in the Asia-Pacific Region,
will be actively involved in the efforts to maintain Hong Kong's financial stability.
Secondly, the two places should work closely together to maintain and enhance
Hong Kong's status as an international financial centre. Hong Kong has some unique competitive
advantages in being an international financial centre in a number of aspects such as opportunities,
geographic location and people. I have made it clear to the international financial community on
many occasions that after China's resumption of sovereignty over Hong Kong, the status of Hong
Kong as an international financial centre will not be undermined but, rather, it will be further
strengthened. This is because the many unique advantages which Hong Kong enjoys now will
continue to exist after 1997. There is also the Basic Law which guarantees that Hong Kong will
remain unchanged. More importantly, with the sustained, rapid and healthy growth of the
economy in China - the vast hinterland at the back of Hong Kong - numerous opportunities will
be created for Hong Kong's financial sector. All these are favourable conditions for the
maintenance and strengthening of Hong Kong's status as an international financial centre.
Economic developments in the mainland have given rise to strong demand for funds and Hong
Kong will continue to be our major funding centre. We will strengthen our coordination and
cooperation with Hong Kong in areas such as the development of markets and infrastructures in
response to the needs of financial developments in both places. I have met with many central
bankers and major international bankers and they all agreed that Hong Kong should be able to
maintain its status as an international financial centre as regards the future relationship between
Hong Kong and Shanghai. I think as a national economic centre, Shanghai's financial status will
become increasingly important. However, it will not be possible for Shanghai to become an
international financial centre in the longer term and it will not replace Hong Kong.
Thirdly, the mainland and Hong Kong should co-operate fully with each other so as
to promote prosperity and stability. Since the implementation of economic reforms and the
opendoor policy, financial co-operation between the two places has been strengthened which, in turn,
helps to develop economic and trading ties. At present, China and Hong Kong are each other's
major investment and trading partner. As at the end of 1995, Hong Kong's total cumulative
investment in China reached US$ 78.6 billion, accounting for 58% of total foreign investment in
China. In 1995, 90% of the syndicated loans to China were arranged in Hong Kong and 90% of
the Chinese companies listed on overseas stock markets have their primary listing in Hong Kong.
The volume of import and export trade between the two places amounted to US$ 44.6 billion last
year, accounting for 15.9% of China's total external trade. If Hong Kong's entrepôt trade which
came from China is also taken into account, the figure reached US$ 124.1 billion, accounting for
34.1% of Hong Kong's total external trade in that year. The number of mainland financial
institutions in Hong Kong is on the rise and vice versa. These institutions are going to provide a
whole range of financial services which are conducive to the continuous and stable development
of the economic relationship between the two places.
China will further open up its financial markets. This includes the opening up of
more districts, the gradual relaxation of renminbi business and the gradual introduction of the
investment banking mechanism. The Hong Kong financial sector will directly benefit from these
moves since they will offer numerous business opportunities. In the course of stepping up our
pace of financial reforms, we have to keep on learning from advanced international management
experience and to provide training to outstanding personnel. We hope that the financial
community in Hong Kong will provide us with assistance and support in these areas.
Before ending my speech, I would like to point out that the Hong Kong Association
of Banks has contributed a lot in assisting the HKMA to ensure the financial stability of Hong
Kong. I hope all of you will continue to give your support to the HKMA and play a more active
role in promoting economic and financial developments in Hong Kong and its smooth transition. I
would also like to announce that an association of mainland banks will be formed this year. I hope
that the two banking associations will strengthen their exchanges and co-operation and work
together for a more prosperous future.
A delegation from the Hong Kong Association of Banks will visit Beijing in a few
days. I would like to welcome the delegation on behalf of the People's Bank of China. I will meet
with some of you again on that occasion. We can further exchange views on the strengthening of
co-operation between the banking sectors on the mainland and in Hong Kong.
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["mr. dai looks at the possibilities of strengthening financial co-operation between china and hong kong in order to promote economic prosperity and stability speech by the governor of the people's bank of china, mr. dai xianglong, at the hong kong association of banks' dinner on 13/11/96.", 'i would like to thank the hong kong association of banks for inviting me to hong kong to meet with you and to attend this dinner function.', 'although this is my first visit to hong kong since taking up my post in the central bank, we follow closely the economic developments of hong kong.', 'all of you have contributed to the prosperity of hong kong.', 'i greatly appreciate the wisdom and the spirit of the people of hong kong.', 'they are industrious and always striving for the better.', "hong kong's success is partly attributable to the characteristics of its people.", 'we have good reasons to believe that through our joint efforts, hong kong will have an even better future.', 'i would like to take this opportunity to give a brief description of the current situation of the economic and financial reforms in the mainland as well as the basic principles and policies towards the financial relationship between china and hong kong after 1997. in addition, i would also say something on co-operation and joint development between the financial sectors of china and hong kong.', "i. mainland china's economy is experiencing a stable development first of all, i would like to talk about the financial and economic conditions of china which is a hot topic for discussion among professionals from the hong kong financial sector.", "this is because hong kong's future is closely linked with the economic and financial developments of china.", "china's economy began to pick up in 1992 with a dynamic national economy.", 'however, there was also hyper-inflation.', 'during the latter half of 1993, the chinese government began to adopt an appropriately tight monetary policy.', 'the adoption of this policy means firstly, price increases should be kept at a level lower than the rate of economic growth.', 'secondly, the growth of money supply should be slightly above the sum of the rate of economic growth and the target rate of the price increase.', 'thirdly, indirect monetary instruments should be used more frequently for relating money supply so that the economy will not be too volatile.', 'our efforts in the past three years are beginning to pay off.', 'we have successfully curbed inflation by making macro-economic adjustments.', 'firstly, the growth of the money supply has slowed down.', 'it is expected that the total money supply at the end of this year will be 26% higher than the previous year.', 'this growth rate is 3.7% lower than the average annual growth rate during the period under the "eighth fiveyear plan".', 'secondly, price increases have slackened noticeably.', 'during the period from january to october, retail prices have risen by 6.4% as compared to the same period last year.', 'it is expected that the growth rate for the whole year will be around 6.5%.', 'thirdly, the economy continues to grow at a relatively high rate.', 'during the period from january to september, gdp rose by 9.6%.', 'it is anticipated that the annual growth rate will exceed 9.5%.', 'fourthly, our foreign reserves continue to grow.', 'as at the end of october, our foreign reserves reached us$ 98.8 billion.', 'we are certain that our reserves will exceed us$ 100 billion by the end of the year.', 'the trade surplus is estimated to be over us$ 100 billion this year.', 'there is also us$ 40 billion of foreign direct investment.', 'the supply of foreign exchange exceeds demand and the exchange rate of the renminbi remains stable.', 'moreover, the renminbi has become fully convertible in the current account.', 'our experience proves that we are right in adopting an appropriately tight financial and economic policy.', 'our ability in performing macro-economic operations has improved greatly and our achievements are recognised internationally.', 'despite the foregoing, several major problems remain to be solved.', 'the percentage of financial revenues in gdp is still falling.', 'the asset quality of banks still needs to be improved.', 'the basic elements of the agricultural sector remain relatively weak and it is unlikely to have any improvement in the operational efficiency of state-owned enterprises in the short run.', 'in view of the current economic situation, the focus of economic and financial reforms in the coming year will be placed on promoting the reform of the economic system and changing the pattern of economic growth.', 'we will continue to adopt an appropriately tight financial and monetary policy.', 'further efforts will be made to adjust the structure of the economy so as to foster new areas of economic growth.', 'in order to ensure steady growth of the national economy, efforts will also be made to develop domestic as well as overseas markets.', "based on the above considerations, it is desirable that next year's target annual gnp growth rate should be set at 8-9% while the retail price increase be contained at a level below 6%.", "in order to achieve these targets, the people's bank of china is prepared to: 1. control money supply.", "our preliminary proposal is to contain the increase of next year's total money supply (m2) within the range of 23% to 25%.", '2. adjust the credit structure.', 'the total amount of loans to the agricultural sector will be increased.', 'economic integration and the setting up of conglomerates will be encouraged.', 'efforts will also be made to promote the development and sale of residential property.', '3. conduct monetary operations.', 'employ more frequently monetary policy instruments such as interest rate policy, reserve requirements and open market operations to regulate the money supply.', '4. deepen financial reforms.', 'reforms of state banks should be stepped up.', 'new commercial banks will be set up.', 'the policy of transforming rural credit co-operatives into co-operative financial institutions will be maintained.', 'direct financing will be developed in a prudent way with better management.', 'in addition, the financial sector will continue to open up.', '5. foster risk management.', 'continue the rationalisation of financial order and prevent and eliminate financial risks.', 'it is envisaged that china\'s economy and society will continue to develop steadily in the coming years and objectives embodied in the "ninth five-year plan" can be achieved.', 'china will enter the 21st century with a dynamic economy and society.', 'basic principles and policies governing the financial relationship between mainland china and hong kong after 1997 as china and hong kong have different currencies and financial systems, people from hong kong as well as the international community are very much concerned with how the principle of "one country, two systems" can be implemented as regards financial issues.', 'it is because the implementation of this principle has direct bearings on the prosperity and stability of hong kong as well as the status of hong kong as an international financial centre.', '"the basic law of the hong kong special administrative region of the people\'s republic of china" lays down specific provisions relating to hong kong\'s status as an international financial centre, its monetary and financial policies, the status of the hong kong dollar and the issuing arrangements, capital flows and the role of the exchange fund.', 'our national leaders have reiterated on different occasions that the people\'s bank of china, which is the central bank of the people\'s republic of china, should insist on implementing the "basic law" and the principle of "one country, two systems".', 'we should also protect the financial relationship between hong kong and the mainland which can be summarised as "one country, two currencies, two monetary systems and two monetary authorities" within a sovereign state and deal with issues relating to this relationship in an appropriate manner.', 'at the imf/world bank annual meeting which was held in late september this year, i stated in my speech our principles governing the financial relationship between the mainland and hong kong.', "mr chen yuan, the deputy governor of the people's bank of china, also presented these principles in a systematic manner at the bank of england seminar which was held in september this year.", "both the people's bank of china and the hong kong monetary authority (hkma) have been offered membership in the bank for international settlements.", 'this is a clear demonstration of the above principles and shows that the mutually independent financial relationship between the mainland and hong kong are widely accepted by international financial organisations.', 'now i am going to give an outline of the main issues relating to the financial relationship between the mainland and hong kong after 1997. hong kong will continue to maintain its own system of currency issuance and management after 1997. the hong kong dollar and the renminbi will circulate as legal tender in hong kong and the mainland respectively.', "hong kong's existing note-issuing arrangements will remain unchanged.", "moreover, china supports hong kong's commitment to the maintenance of the linked exchange rate system.", 'it follows from the two mutually independent monetary systems of the mainland and hong kong that the two monetary authorities, i.e.', "the people's bank of china and the hkma, will also be mutually independent.", 'the hkma will be accountable solely to the hong kong government.', "the people's bank of china will not take the place of the hkma and will not set up any office in hong kong.", "the people's bank of china will strengthen further its present sound co-operation with the hkma.", 'the hkma has made great contributions to the stability of the local currency and the supervision of financial institutions.', 'such efforts by the hkma help promote the prosperity and smooth transition of hong kong.', 'the hong kong government will continue to supervise local financial institutions.', "the supervision will continue to be undertaken in accordance with hong kong's laws and international rules and practices.", 'mainland financial institutions in hong kong shall not enjoy any privileges.', 'they shall be regulated by the relevant supervisory authorities in hong kong.', 'the exchange fund of hong kong shall be managed and controlled by the hong kong government.', 'the financial revenues of the hong kong special administrative region shall be used exclusively for its own purposes and the chinese government shall not levy taxes in hong kong.', "moreover, china will not draw on or resort to hong kong's exchange fund or other assets in any way and for any reason.", 'all financial transactions between the mainland and hong kong will be conducted in accordance with the rules and practices of international financial activities.', 'claims and liabilities between institutions from the mainland and those from hong kong will continue to be regarded as external claims and liabilities.', 'when participating in the hong kong market, chinese entities will have equal treatment as other international and local market participants.', 'apart from the above, it is also important for hong kong as an international financial centre to continue to develop its international monetary relations and participate in the activities of international and regional financial institutions.', 'there are therefore provisions in the joint declaration and the basic law that hong kong may, on its own, maintain and develop financial relations with other countries, regions and relevant international organisations after 1997. the 1997 world bank/imf annual meeting will be held in hong kong just a few months after china resumes the exercise of sovereignty over hong kong.', 'this is a magnificent financial event and i am confident that it will be successful.', 'iii the strengthening of financial co-operation and the promotion of economic prosperity and stability between the mainland and hong kong mainland china and hong kong have close financial links with each other.', 'since the implementation of financial reforms and the open-door policy, such links have been strengthened further.', 'it is necessary to further enhance such a mutually beneficial relationship between the two places.', 'first of all, the mainland and hong kong should work together for the prosperity, stability and smooth transition of hong kong.', 'china\'s commitment to the implementation of the "one country, two systems" principle is increasingly accepted and appreciated by the people of hong kong and the international community.', "worries and doubts about the future of hong kong which emerged in the early 1980's have largely subsided.", 'we are pleased to note that the financial situation in hong kong is heading towards a smooth transition.', "we are confident that hong kong will enjoy financial stability before and after 1997. even though there may be some fluctuations in hong kong's financial market, we believe that the hkma is fully capable of handling these situations satisfactorily.", "if necessary, the people's bank of china will, at the request of the hkma and in accordance with the basic law and market practices, offer support to the hkma.", 'financial stability in hong kong before and after 1997 is not only essential to the prosperity of hong kong and china but also to financial stability in the asia-pacific region.', "we are confident that the international financial community, including the central banks in the asia-pacific region, will be actively involved in the efforts to maintain hong kong's financial stability.", "secondly, the two places should work closely together to maintain and enhance hong kong's status as an international financial centre.", 'hong kong has some unique competitive advantages in being an international financial centre in a number of aspects such as opportunities, geographic location and people.', "i have made it clear to the international financial community on many occasions that after china's resumption of sovereignty over hong kong, the status of hong kong as an international financial centre will not be undermined but, rather, it will be further strengthened.", 'this is because the many unique advantages which hong kong enjoys now will continue to exist after 1997. there is also the basic law which guarantees that hong kong will remain unchanged.', "more importantly, with the sustained, rapid and healthy growth of the economy in china - the vast hinterland at the back of hong kong - numerous opportunities will be created for hong kong's financial sector.", "all these are favourable conditions for the maintenance and strengthening of hong kong's status as an international financial centre.", 'economic developments in the mainland have given rise to strong demand for funds and hong kong will continue to be our major funding centre.', 'we will strengthen our coordination and cooperation with hong kong in areas such as the development of markets and infrastructures in response to the needs of financial developments in both places.', 'i have met with many central bankers and major international bankers and they all agreed that hong kong should be able to maintain its status as an international financial centre as regards the future relationship between hong kong and shanghai.', "i think as a national economic centre, shanghai's financial status will become increasingly important.", 'however, it will not be possible for shanghai to become an international financial centre in the longer term and it will not replace hong kong.', 'thirdly, the mainland and hong kong should co-operate fully with each other so as to promote prosperity and stability.', 'since the implementation of economic reforms and the opendoor policy, financial co-operation between the two places has been strengthened which, in turn, helps to develop economic and trading ties.', "at present, china and hong kong are each other's major investment and trading partner.", "as at the end of 1995, hong kong's total cumulative investment in china reached us$ 78.6 billion, accounting for 58% of total foreign investment in china.", 'in 1995, 90% of the syndicated loans to china were arranged in hong kong and 90% of the chinese companies listed on overseas stock markets have their primary listing in hong kong.', "the volume of import and export trade between the two places amounted to us$ 44.6 billion last year, accounting for 15.9% of china's total external trade.", "if hong kong's entrepôt trade which came from china is also taken into account, the figure reached us$ 124.1 billion, accounting for 34.1% of hong kong's total external trade in that year.", 'the number of mainland financial institutions in hong kong is on the rise and vice versa.', 'these institutions are going to provide a whole range of financial services which are conducive to the continuous and stable development of the economic relationship between the two places.', 'china will further open up its financial markets.', 'this includes the opening up of more districts, the gradual relaxation of renminbi business and the gradual introduction of the investment banking mechanism.', 'the hong kong financial sector will directly benefit from these moves since they will offer numerous business opportunities.', 'in the course of stepping up our pace of financial reforms, we have to keep on learning from advanced international management experience and to provide training to outstanding personnel.', 'we hope that the financial community in hong kong will provide us with assistance and support in these areas.', 'before ending my speech, i would like to point out that the hong kong association of banks has contributed a lot in assisting the hkma to ensure the financial stability of hong kong.', 'i hope all of you will continue to give your support to the hkma and play a more active role in promoting economic and financial developments in hong kong and its smooth transition.', 'i would also like to announce that an association of mainland banks will be formed this year.', 'i hope that the two banking associations will strengthen their exchanges and co-operation and work together for a more prosperous future.', 'a delegation from the hong kong association of banks will visit beijing in a few days.', "i would like to welcome the delegation on behalf of the people's bank of china.", 'i will meet with some of you again on that occasion.', 'we can further exchange views on the strengthening of co-operation between the banking sectors on the mainland and in hong kong.']
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Dai Xianglong
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People's Bank of China
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Governor
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China
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https://www.bis.org/review/r970211a.pdf
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Mr. Dai assesses the outlook for Hong Kong as Asia's financial centre (Central Bank Articles and Speeches, 30 Sep 96)
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Speech by the Governor of the People's Bank of China, Mr. Dai Xianglong, at the luncheon hosted by the Hong Kong Financial Secretary in Washington on 30/9/96.
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1996-09-30 00:00:00
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Mr. Dai assesses the outlook for Hong Kong as Asia's financial centre
Speech by the Governor of the People's Bank of China, Mr. Dai Xianglong, at the luncheon
hosted by the Hong Kong Financial Secretary in Washington on 30/9/96.
The 1997 World Bank/IMF Annual Meetings will be held in Hong Kong next
year. Mr Liu Zhongli, the Minister of Finance and myself will be there welcoming you as the
host of the occasion. I foresee that the Annual Meetings to be held next year will be a
magnificent event which commands far-reaching historical significance. This is because the
Annual Meetings of the two important international financial organisations are to be held in
Hong Kong just a few months after China resumes the exercise of sovereignty over Hong Kong.
Representatives from various countries will have the opportunity to witness the realisation of the
principle of "one country, two systems" in Hong Kong. I believe that nobody will wish to miss
such an opportunity.
Mr Tsang has just expressed his views on the economy of Hong Kong before and
after 1997. I would like to say a few words from the perspective of the People's Bank of China
(PBOC). I have stated on many occasions that we are confident that after China resumes the
exercise of sovereignty over Hong Kong, the territory will not only remain prosperous and
stable, but its status as an international financial centre will also be further enhanced.
And I have good reasons for this confidence.
First, there are the strong economic fundamentals of Hong Kong and the
entrepreneurial and management skills of the people of Hong Kong. These form the basis for
Hong Kong's continued prosperity and stability and for maintaining Hong Kong's status as an
international financial centre.
As you all know, Hong Kong is an international trade, transport, financial and
information centre. With the rapid economic developments taking place in the Asia-Pacific
region, Hong Kong's role as an international financial centre will not be weakened; instead, its
importance will certainly increase. According to the "Joint Declaration of the Government of the
United Kingdom of Great Britain and Northern Ireland and the Government of the People's
Republic of China on the Question of Hong Kong" and "The Basic Law of the Hong Kong
Special Administrative Region of the People's Republic of China", Hong Kong will become a
Special Administrative Region of the People's Republic of China from 1 July 1997. It will enjoy
a high degree of autonomy with Hong Kong people ruling Hong Kong. Hong Kong will become
an independent tariff and trade region and an international financial centre in China but with its
own currency. In order to maintain its status as an international financial centre, Hong Kong will
inevitably face various challenges. However, Hong Kong will continue to have a sound legal
system, advanced communication facilities and infrastructures, professional and management
expertise, and strong foreign reserves. Currently, Hong Kong's foreign reserves rank seventh in
the world while China's rank second. With the backing of such strong economic strength, we are
confident that Hong Kong's status as an international financial centre will be maintained and
further enhanced.
Secondly, from the legal angle, the Basic Law assures the continuation and
enhancement of Hong Kong's status as an international financial centre.
Articles 109 to 113 of the Basic Law lay down specific provisions relating to
Hong Kong's status as an international financial centre, its monetary and financial policies, the
status of the Hong Kong dollar and the issuing arrangements, capital movements and the role of
the Exchange Fund. These principles establish the basic monetary relationship between China
and Hong Kong under the principle of "one country, two systems", and this can conveniently be
summarised as "one country, two currencies, two monetary systems and two monetary
authorities" within a sovereign state. It should be pointed out that the co-existence of two
currencies, that is, the Hong Kong dollar and the renminbi, is a clear demonstration of the
differences between the economies of Hong Kong and the mainland. It is therefore essential that
the two monetary systems should be mutually independent. The renminbi will not replace the
Hong Kong dollar. We are of the view that the co-existence of two monetary systems is
significant to the economic reform of China.
It follows from the two mutually independent monetary systems of the mainland
and Hong Kong that the two monetary authorities will also be mutually independent and one is
not superior to the other. The Hong Kong Monetary Authority (HKMA) will be accountable
solely to the Hong Kong Special Administrative Region Government from 1 July 1997. The
PBOC will not take the place of the HKMA and will not set up any branch office in Hong Kong.
I am glad that international organisations and other central banks also
acknowledge the mutually independent relationship between the PBOC and the HKMA.
Both the PBOC and the HKMA were offered membership in the Bank for
International Settlements in early September this year. This shows that the work done by the
PBOC and the HKMA are widely accepted and appreciated by the central banking fraternity.
This also shows that the international financial community fully supports the principle of "one
country, two systems" laid down by the Basic Law.
The Basic Law also states that the Exchange Fund shall be managed and
controlled by the Hong Kong government. It also states that the revenues of the Hong Kong
Special Administrative Region shall be used exclusively for its own purposes. In addition, the
Basic Law stipulates that the Chinese Government will not levy taxes in Hong Kong. These
three-fold safeguards are evidence that China will not interfere with Hong Kong's financial
matters. We have reiterated time and again that under no circumstances will China draw on or
resort to Hong Kong's Exchange Fund or other assets in any way or for any reason. On the
contrary, the PBOC will support the currency stability of Hong Kong. The PBOC and the
HKMA entered into a bilateral agreement on repurchase of US treasury paper early this year.
We also stand ready to provide funds to support the Hong Kong dollar, if necessary.
Thirdly, the economic development of the mainland has created excellent
conditions for the continuity and further strengthening of Hong Kong's prosperity and stability.
Economic development in the mainland provides a strong support to Hong Kong's economic
development. China is confident in Hong Kong's maintaining prosperity and stability after 1997
because we have full confidence in the economic development in China.
China is firmly committed to continuing with its economic reform and our
achievements are widely recognised. Currently, the macro-economic situation in mainland China
is steady. The various macro-economic indicators do meet our targets laid down early this year
and some even out-perform our expectations. It is anticipated that this year's economic growth
will be around 9%. The retail price is expected to rise by about 7% and is expected to remain
steady over the next two years or may even ease further. At present, our foreign reserves are
over US$ 90 billion and are expected to exceed US$ 95 billion by the end of this year. Since the
beginning of the second quarter this year, external trade has posted some steady growth. There is
a significant inflow of capital and our balance of payments is in a healthy position. Therefore the
exchange rate of the renminbi, which is determined by the market, will remain stable. The
renminbi, for all intents and purposes has become fully convertible in the current account. We
are in advance of our schedule in satisfying the requirement stipulated in Article VIII of the IMF
Articles of Agreement.
In the next five years, China will continue to adopt an appropriately tight
monetary policy. The adoption of this policy means firstly, we will have an appropriately tight
monetary stance to keep inflation at a level lower than the rate of economic growth. Secondly,
money supply should grow at an appropriate level. In the next five years, the annual growth rate
of M1 will be kept at around 18% and M2 at 21% to 23%. Thirdly, reforms and improvements
will continuously be made to the approach in making macro-economic adjustment. That is, we
will move from reliance on direct control of the volume of credit towards regulating money
supply by means of indirect monetary policy instruments such as reserve requirements, open
market operations and interest rate policy. Appropriately tight monetary policy is not limited to
the control of total credit but also adjustment of the credit structure, deepening of monetary
reforms, and timely adjustments to the different aspects of the monetary system. An
appropriately tight monetary policy is conducive to the healthy, stable and sustained growth of
the national economy. It also helps to create favourable conditions for the resumption of
sovereignty and the continued prosperity of Hong Kong.
Stability in China is the very basis for Hong Kong's stability while Hong Kong's
stability will certainly enhance economic reform and developments in China. Foreign investors
in Hong Kong will, at the same time, benefit from the stability of China and Hong Kong.
Those sceptics who have doubted China's commitment to the open door policy no
longer can have such doubts after witnessing the implementation of our economic reforms and
its achievements. I hope you will recognise that China is firmly committed to implementing the
principle of "one country, two systems" and maintaining the prosperity and stability of Hong
Kong, just as we have been firmly committed to the implementation of economic reform in
China. The principle of "one country, two systems" is the realisation of the spirit of our
constitution and has become a long-term irreversible national policy. As China continues to
pursue its economic reform, Hong Kong's role as the international financial centre in China will
become more and more important. We will do our best to help maintain the existing economic
system of Hong Kong and keep up its economic dynamism. We also hope that the international
financial community will join us in our efforts to maintain Hong Kong's prosperity and stability.
Ladies and gentlemen, when you come to next year's Annual Meetings in Hong Kong, you will
all see for yourselves the realisation of the principle of "one country, two systems" in Hong
Kong. In addition, I believe that the 1997 World Bank/IMF Annual Meetings will be an
impressive event as a result.
|
["mr. dai assesses the outlook for hong kong as asia's financial centre speech by the governor of the people's bank of china, mr. dai xianglong, at the luncheon hosted by the hong kong financial secretary in washington on 30/9/96.", 'the 1997 world bank/imf annual meetings will be held in hong kong next year.', 'mr liu zhongli, the minister of finance and myself will be there welcoming you as the host of the occasion.', 'i foresee that the annual meetings to be held next year will be a magnificent event which commands far-reaching historical significance.', 'this is because the annual meetings of the two important international financial organisations are to be held in hong kong just a few months after china resumes the exercise of sovereignty over hong kong.', 'representatives from various countries will have the opportunity to witness the realisation of the principle of "one country, two systems" in hong kong.', 'i believe that nobody will wish to miss such an opportunity.', "mr tsang has just expressed his views on the economy of hong kong before and after 1997. i would like to say a few words from the perspective of the people's bank of china (pboc).", 'i have stated on many occasions that we are confident that after china resumes the exercise of sovereignty over hong kong, the territory will not only remain prosperous and stable, but its status as an international financial centre will also be further enhanced.', 'and i have good reasons for this confidence.', 'first, there are the strong economic fundamentals of hong kong and the entrepreneurial and management skills of the people of hong kong.', "these form the basis for hong kong's continued prosperity and stability and for maintaining hong kong's status as an international financial centre.", 'as you all know, hong kong is an international trade, transport, financial and information centre.', "with the rapid economic developments taking place in the asia-pacific region, hong kong's role as an international financial centre will not be weakened; instead, its importance will certainly increase.", 'according to the "joint declaration of the government of the united kingdom of great britain and northern ireland and the government of the people\'s republic of china on the question of hong kong" and "the basic law of the hong kong special administrative region of the people\'s republic of china", hong kong will become a special administrative region of the people\'s republic of china from 1 july 1997. it will enjoy a high degree of autonomy with hong kong people ruling hong kong.', 'hong kong will become an independent tariff and trade region and an international financial centre in china but with its own currency.', 'in order to maintain its status as an international financial centre, hong kong will inevitably face various challenges.', 'however, hong kong will continue to have a sound legal system, advanced communication facilities and infrastructures, professional and management expertise, and strong foreign reserves.', "currently, hong kong's foreign reserves rank seventh in the world while china's rank second.", "with the backing of such strong economic strength, we are confident that hong kong's status as an international financial centre will be maintained and further enhanced.", "secondly, from the legal angle, the basic law assures the continuation and enhancement of hong kong's status as an international financial centre.", "articles 109 to 113 of the basic law lay down specific provisions relating to hong kong's status as an international financial centre, its monetary and financial policies, the status of the hong kong dollar and the issuing arrangements, capital movements and the role of the exchange fund.", 'these principles establish the basic monetary relationship between china and hong kong under the principle of "one country, two systems", and this can conveniently be summarised as "one country, two currencies, two monetary systems and two monetary authorities" within a sovereign state.', 'it should be pointed out that the co-existence of two currencies, that is, the hong kong dollar and the renminbi, is a clear demonstration of the differences between the economies of hong kong and the mainland.', 'it is therefore essential that the two monetary systems should be mutually independent.', 'the renminbi will not replace the hong kong dollar.', 'we are of the view that the co-existence of two monetary systems is significant to the economic reform of china.', 'it follows from the two mutually independent monetary systems of the mainland and hong kong that the two monetary authorities will also be mutually independent and one is not superior to the other.', 'the hong kong monetary authority (hkma) will be accountable solely to the hong kong special administrative region government from 1 july 1997. the pboc will not take the place of the hkma and will not set up any branch office in hong kong.', 'i am glad that international organisations and other central banks also acknowledge the mutually independent relationship between the pboc and the hkma.', 'both the pboc and the hkma were offered membership in the bank for international settlements in early september this year.', 'this shows that the work done by the pboc and the hkma are widely accepted and appreciated by the central banking fraternity.', 'this also shows that the international financial community fully supports the principle of "one country, two systems" laid down by the basic law.', 'the basic law also states that the exchange fund shall be managed and controlled by the hong kong government.', 'it also states that the revenues of the hong kong special administrative region shall be used exclusively for its own purposes.', 'in addition, the basic law stipulates that the chinese government will not levy taxes in hong kong.', "these three-fold safeguards are evidence that china will not interfere with hong kong's financial matters.", "we have reiterated time and again that under no circumstances will china draw on or resort to hong kong's exchange fund or other assets in any way or for any reason.", 'on the contrary, the pboc will support the currency stability of hong kong.', 'the pboc and the hkma entered into a bilateral agreement on repurchase of us treasury paper early this year.', 'we also stand ready to provide funds to support the hong kong dollar, if necessary.', "thirdly, the economic development of the mainland has created excellent conditions for the continuity and further strengthening of hong kong's prosperity and stability.", "economic development in the mainland provides a strong support to hong kong's economic development.", "china is confident in hong kong's maintaining prosperity and stability after 1997 because we have full confidence in the economic development in china.", 'china is firmly committed to continuing with its economic reform and our achievements are widely recognised.', 'currently, the macro-economic situation in mainland china is steady.', 'the various macro-economic indicators do meet our targets laid down early this year and some even out-perform our expectations.', "it is anticipated that this year's economic growth will be around 9%.", 'the retail price is expected to rise by about 7% and is expected to remain steady over the next two years or may even ease further.', 'at present, our foreign reserves are over us$ 90 billion and are expected to exceed us$ 95 billion by the end of this year.', 'since the beginning of the second quarter this year, external trade has posted some steady growth.', 'there is a significant inflow of capital and our balance of payments is in a healthy position.', 'therefore the exchange rate of the renminbi, which is determined by the market, will remain stable.', 'the renminbi, for all intents and purposes has become fully convertible in the current account.', 'we are in advance of our schedule in satisfying the requirement stipulated in article viii of the imf articles of agreement.', 'in the next five years, china will continue to adopt an appropriately tight monetary policy.', 'the adoption of this policy means firstly, we will have an appropriately tight monetary stance to keep inflation at a level lower than the rate of economic growth.', 'secondly, money supply should grow at an appropriate level.', 'in the next five years, the annual growth rate of m1 will be kept at around 18% and m2 at 21% to 23%.', 'thirdly, reforms and improvements will continuously be made to the approach in making macro-economic adjustment.', 'that is, we will move from reliance on direct control of the volume of credit towards regulating money supply by means of indirect monetary policy instruments such as reserve requirements, open market operations and interest rate policy.', 'appropriately tight monetary policy is not limited to the control of total credit but also adjustment of the credit structure, deepening of monetary reforms, and timely adjustments to the different aspects of the monetary system.', 'an appropriately tight monetary policy is conducive to the healthy, stable and sustained growth of the national economy.', 'it also helps to create favourable conditions for the resumption of sovereignty and the continued prosperity of hong kong.', "stability in china is the very basis for hong kong's stability while hong kong's stability will certainly enhance economic reform and developments in china.", 'foreign investors in hong kong will, at the same time, benefit from the stability of china and hong kong.', "those sceptics who have doubted china's commitment to the open door policy no longer can have such doubts after witnessing the implementation of our economic reforms and its achievements.", 'i hope you will recognise that china is firmly committed to implementing the principle of "one country, two systems" and maintaining the prosperity and stability of hong kong, just as we have been firmly committed to the implementation of economic reform in china.', 'the principle of "one country, two systems" is the realisation of the spirit of our constitution and has become a long-term irreversible national policy.', "as china continues to pursue its economic reform, hong kong's role as the international financial centre in china will become more and more important.", 'we will do our best to help maintain the existing economic system of hong kong and keep up its economic dynamism.', "we also hope that the international financial community will join us in our efforts to maintain hong kong's prosperity and stability.", 'ladies and gentlemen, when you come to next year\'s annual meetings in hong kong, you will all see for yourselves the realisation of the principle of "one country, two systems" in hong kong.', 'in addition, i believe that the 1997 world bank/imf annual meetings will be an impressive event as a result.']
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Dai Xianglong
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People's Bank of China
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Governor
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China
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https://www.bis.org/review/r970203b.pdf
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Mr. Rangarajan examines the objectives of monetary policy and price stability in relation to the economy of India (Central Bank Articles and Speeches, 28 Dec 96)
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Address by the Governor of the Reserve Bank of India, Mr. C. Rangarajan, at the Second Conference of the Econometric Society's Regional Chapter for India and South Asia in Delhi on 28/12/96.
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1996-12-28 00:00:00
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Mr. Rangarajan examines the objectives of monetary policy and price
stability in relation to the economy of India Address by the Governor of the Reserve Bank of
India, Mr. C. Rangarajan, at the Second Conference of the Econometric Society's Regional
Chapter for India and South Asia in Delhi on 28/12/96.
1. It gives me indeed very great pleasure to be in your midst this morning. It
is indeed very gratifying to note that the Second Conference of the Econometric Society's
Regional Chapter for India and South East Asia is being held in Delhi.
2. Econometrics as a discipline has come a long way. Enriched by the
developments both in mathematical economics and statistical methods, econometrics has today
become an indispensable tool to all practitioners. Without a numerical evaluation of economic
magnitudes, economic theory would have been of little use in economic policy. The original
motto of Cowles Foundation was 'Science is measurement'. It used to be said that in economics
the tendency of theory to lag behind observations seemed to be endemic. We have definitely
moved away from that situation. While alternative theories to explain a set of phenomena are
not necessarily a weakness and may even be regarded as a sign of vitality, the continued
co-existence of alternative theories over a substantial period of time without being able to
discriminate among them can result in the loss of credibility in the discipline itself. This in part
is the present status of economics. The future scope of econometrics is thus immense.
3. I would like to take this opportunity given to me this morning to raise one
issue in monetary policy that still remains contentious despite overwhelming agreement among
policy makers in industrially advanced countries. The issue relates to the objective of monetary
policy. The question is: What should be the objective or objectives of monetary policy and
whether in the Indian context, maintenance of price stability should be the dominant objective of
monetary policy?
4. The issue of objective has become important because of the need to
provide clear guidance to monetary policy makers. Indeed this aspect has assumed added
significance in the context of the increasing stress on autonomy of central banks. While
autonomy has to go with accountability, accountability itself requires a clear enunciation of
goals.
5. Monetary policy has now moved to the centre stage of economic
policy-making the world over. In the 1930s and in the first two decades after the Second World
War, monetary policy was relegated to the background. The ascendancy of fiscal policy during
this period was due in part to the depression of the 1930s, and the process of reconstruction
immediately after the Second World War and the acceptance of the Keynesian dictum that fiscal
action was necessary to prevent deficiency in the aggregate demand. However, the 1970s saw
the emergence of a combination of high inflation and low growth - 'stagnation' as it came to be
called - and the standard Keynesian analysis was hard put to explain that phenomenon.
Consequently, monetary policy re-emerged as an instrument of economic policy particularly in
the fight against inflation. Issues relating to the conduct of monetary policy came to the forefront
of policy debates in the 1980s. The relative importance of growth and price stability as the
objective of monetary policy as well as the appropriate intermediate target of monetary policy
became the focus of attention. Over the years, a consensus has emerged among the industrially
advanced countries that the dominant objective of monetary policy should be price stability.
Incorporation of this objective in the Maastrischt Treaty is indeed a reflection of this consensus.
Differences however, exist among central banks even in industrially advanced countries as
regards the appropriate intermediate target. While some central banks consider monetary
aggregates and therefore monetary targeting as operationally meaningful, some others focus
exclusively on interest rate even though the inter-relationship between the two targets is well
recognised.
6. A similar trend regarding monetary policy is discernible in developing
economies as well. Much of the early literature on development economics focused on real
factors such as savings, investment and technology as main springs of growth. Very little
attention was paid to the financial system as a contributory factor to economic growth. In fact,
many writers felt that inflation was endemic in the process of economic growth and it was
accordingly treated more as a consequence of structural imbalance than as a monetary
phenomenon. However, with the accumulated evidence, it became clear that any process of
economic growth in which monetary expansion was disregarded also led to inflationary
pressures with a consequent impact on economic growth. Accordingly, importance of price
stability and therefore the need to use monetary policy for that purpose also assumed importance
in developing economies. Nonetheless, the debate on the extent to which price stability should
be deemed to be the over-riding objective of monetary policy in such economies continues.
7. Monetary policy is an arm of economic policy and in that sense, the
objectives of monetary policy are no different from the overall objectives of economic policy.
The broad objectives of monetary policy in India have been
a) to regulate monetary expansion so as to maintain a reasonable degree of price
stability; and
b) to ensure adequate expansion in credit to assist economic growth.
The emphasis between the two objectives has changed from year to year
depending upon the conditions prevailing in that and the previous year.
8. The question of a dominant objective arises essentially in view of the
multiplicity of objectives and the inherent conflict among such objectives. Jan Tinbergen had
argued decades ago that it was necessary to have at least one instrument for each target. In this
regard, it must be recognised that certain objectives are better suited or more easily achieved
with certain instruments than with others. This 'assignment rule' favours monetary policy as the
most appropriate instrument to achieve the objective of price stability.
9. The crucial question that arises is whether the pursuit of the objective of
price stability by monetary authorities undermines the ability of the economy to attain and
sustain higher growth. A great deal of research effort has been spent on the examination of the
trade-off between economic growth and price stability.
10. The well known Phillips curve showed that there was an inverse
relationship between rate of change in wage rate and unemployment rate suggesting thereby a
trade-off between inflation and unemployment. The original article of Prof. Phillips was
published in 1958. The Phillips curve relationship has subsequently been challenged both from
theoretical and empirical standpoints. The downward slope of the curve arises basically because
of the presence of money illusion and expected inflation deviating from actual inflation.
11. At present the controversy is centred around the possible short-run and
long-run 'trade-off' between inflation and unemployment. This distinction primarily stems from
the assumption of 'error-learning' process in the determination of inflationary expectations
workers do have an anticipation on the inflation, but because they judge the inflation
performance from the past data, the adjustment between the expected and actual inflation is
slow. This implies that in the short-run, nominal wage rise will not fully absorb the actual
inflation, and as such, it is argued, there is scope for reducing unemployment through inflation.
As people adjust their expectations of inflation, the short-run Phillips curve shifts upward and
the unemployment rate returns towards its 'natural' level. As the expected inflation catches up
with actual inflation, the Phillips curve becomes vertical, denying thereby a 'trade-off' between
inflation and unemployment in the long run. The Phillips curve thus provides at best a temporary
trade-off between inflation and unemployment when the economy is adjusting to shocks to
aggregate demand and as long as expected inflation is lower than actual inflation. The long-run
Phillips curve becomes almost vertical at the natural rate of unemployment.
12. Of course, there is a possibility of lengthening the short-run 'trade-offs'
indefinitely, since inflation surprises in each period can elongate the long-run perpetually. But,
in that case the 'trade-offs' will become sharper in each successive period. In other words, to
maintain the unemployment below the 'natural' rate, policy authorities will have to inflate the
economy at higher rates in each successive period. This has a major policy implication even if
the economy does not operate on the long-run vertical Phillips curve. Under the 'rational
expectations hypothesis', as there are no deviations between 'actual', and 'expected' inflation,
both in the short-run and long-run, Phillips curves are treated as being vertical with no trade-off
between inflation and unemployment.
13. Another policy related question is the shape of the short-run Phillips curve
itself. In the real world wages and prices remain sticky, as employment contracts are fairly long
and there is also a cost in changing the individual prices too often, or renegotiating wages each
time after a price rise. As argued by Fischer (1994), the nature of stickiness in wages and prices
could be different in different economies and this could also be a function of the inflation history
of the country concerned. Countries with high inflation rates tend to find themselves on the
steeper portion of the short-run Phillips curve than low inflation countries which are more likely
to be on the flatter side. Therefore, 'trade-off' between price stability and employment or output
even when it does exist, is sharper for countries with relatively high inflation rates than those
with low inflation rates.
14. The case of price stability as the objective of monetary policy rests on the
fact that volatility in prices creates uncertainty in decision making. Rising prices affect savings
adversely while making speculative investments more attractive. The most important
contribution of the financial system to an economy is its ability to augment savings and allocate
resources more efficiently. A regime of rising prices vitiates the atmosphere for promotion of
savings and allocation of investment. Apart from all of these, there is also a social dimension.
Inflation affects adversely those who have no hedges against inflation and that includes all the
poorer sections of the community. Of course, a critical question in this context is at what level of
inflation the adverse consequences begin to set in.
15. Inflation affects fiscal balance in several ways. It adversely affects fiscal
deficit when elasticity of expenditure to inflation is higher than that of revenue. A more
significant impact of inflation arises from its effect on interest rate and the dynamic
sustainability of the fiscal situation. High rates of inflation signal weak resolve to control
inflation and imply higher expected inflation in future. This gives rise to upward rigidity in
nominal interest and leads to high debt service burden on the budget, thus reducing the
manoeuvrability of fiscal management.
16. It is well recognised that adverse implications of inflation are higher at
high rates of inflation, while a moderate inflation rate could be manageable without implying
severe costs. International evidence suggests that the costs of uncertainty tend to rise in a
non-linear fashion with inflation rate exceeding a threshold. One important caveat in
interpreting the threshold of inflation rate beyond which costs exceed benefit is the provision of
inflation protection measures available in the economy, which tends to moderate the adverse
implications to some extent. Countries with a moderate inflation rate but inadequate indexation
provision may show a higher degree of sensitivity to inflation, than those with low inflation.
Most of the industrialised countries in the recent years have moved into an inflation rate ranging
between two to three per cent. Among the developing countries, some of the fast growing
East-Asian economies have in recent years not only demonstrated low inflation rates ranging
between three to five per cent, but the growth rate at these inflation rates has been fairly high at
around eight per cent.
17. Empirical evidence on the relationship between the inflation and growth
in cross-country frameworks is somewhat inconclusive because such studies include countries
with inflation rate of as low as one to two per cent as well as countries with inflation rates going
beyond 200 and 300 per cent. While a number of studies have concluded that the negative
impact of inflation on growth is high at high rates of inflation, there is no consensus about the
threshold inflation rate beyond which the negative impact becomes pronounced. A study by
Bruno indicated that growth rates declined steeply as the inflation rate went beyond 25 per cent.
Another study also based on cross section of countries reported that the negative effect of
inflation was very pronounced and powerful at inflation rates exceeding eight per cent. What the
appropriate inflation threshold beyond which costs tend to exceed benefits need to be estimated
for each country separately. Nevertheless, people worry about even moderate inflation levels
because if not held in check, a little inflation can lead to higher inflation and eventually affect
growth.
18. A macro-econometric model of the Indian economy shows that a 10 per
cent sustained increase in real public investment in non-agriculture sector, financed by money
creation leads to an annual inflation rate of about 2.3 per cent and additional GDP growth of one
percent, on an average, during the first two years, while in the span of 10 to 15 years, inflation
rate rises to about 17 per cent per annum and additional output growth slows down considerably
to average 2.7 per cent during this period. This implies that in the long run a sustained
improvement in the growth scenario through monetary financing of the deficit could involve a
severe trade-off in terms of inflation - every one per cent additional output growth implies
nearly 6 to 6.5 per cent rise in inflation rate in the long run.
19. Obviously, there are some critics of price stability as the dominant
objective of monetary policy. For example Prof. Paul Krugman writes
'.....the belief that absolute price stability is a huge blessing, that it brings
large benefits with few if any costs, rests not on evidence but on faith. The evidence
actually points the other way: the benefits of price stability are elusive, the costs of
getting there are large, and zero inflation may not be a good thing even in the long run.'
The observations of Prof. Krugman as they stand are not directed against price
stability as an objective but are aimed against a policy which seeks 'absolute' price stability and
attempts to bring down the inflation rate from around two per cent to almost zero. This is
evident from what he himself advocates:
'.....adopt as a long run target fairly low but not zero inflation, say
threefour per cent. This is high enough to accommodate most of the real wage cuts that
markets impose, while the costs of the inflation itself will still be very small.
Interestingly, in India, the Chakravarty Committee (1985) treated an inflation rate
of four per cent as 'the acceptable rise in prices' purported to reflect 'changes in relative prices
necessary to attract resources to growth sectors'.
20. We, in India, need to have an appropriate fix on the acceptable level of
inflation rate. In the 1970s, the average annual inflation rate as measured by the wholesale price
index was nine per cent. In the 1980s, it was eight per cent. However, in the period between
1990 and 1995, the average inflation rate has remained around 10 per cent. The objective of the
policy should be to keep the inflation rate around six per cent. This itself is much higher than
what the industrial countries are aiming at and therefore will have some implications for the
exchange rate of the rupee. Monetary growth should be so moderated that while meeting the
objective of growth it does not push the inflation rate beyond six per cent.
21. A question that arises in this context is whether monetary policy by itself
is able to contain inflationary pressures particularly in developing economies like ours. It is true
that developing economies like India are subject to greater supply shocks than developed
economies. Fluctuations in agricultural output have an important bearing on the price situation.
Nevertheless, continuous increase in prices which is what inflation is about cannot occur unless
it is sustained by a continuing increase in money supply. Control of the money supply has thus
to play an important role in any scheme aimed at controlling inflation.
21. The controversy over the objective of monetary policy has reached such a
pitch that some have described central bankism as a religion with hard money as supreme god
and inflation as devil. Let me however say that the commitment to a reasonable degree of price
stability is not a dogma. It is good economics.
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["mr. rangarajan examines the objectives of monetary policy and price stability in relation to the economy of india address by the governor of the reserve bank of india, mr. c. rangarajan, at the second conference of the econometric society's regional chapter for india and south asia in delhi on 28/12/96.", '1. it gives me indeed very great pleasure to be in your midst this morning.', "it is indeed very gratifying to note that the second conference of the econometric society's regional chapter for india and south east asia is being held in delhi.", '2. econometrics as a discipline has come a long way.', 'enriched by the developments both in mathematical economics and statistical methods, econometrics has today become an indispensable tool to all practitioners.', 'without a numerical evaluation of economic magnitudes, economic theory would have been of little use in economic policy.', "the original motto of cowles foundation was 'science is measurement'.", 'it used to be said that in economics the tendency of theory to lag behind observations seemed to be endemic.', 'we have definitely moved away from that situation.', 'while alternative theories to explain a set of phenomena are not necessarily a weakness and may even be regarded as a sign of vitality, the continued co-existence of alternative theories over a substantial period of time without being able to discriminate among them can result in the loss of credibility in the discipline itself.', 'this in part is the present status of economics.', 'the future scope of econometrics is thus immense.', '3. i would like to take this opportunity given to me this morning to raise one issue in monetary policy that still remains contentious despite overwhelming agreement among policy makers in industrially advanced countries.', 'the issue relates to the objective of monetary policy.', 'the question is: what should be the objective or objectives of monetary policy and whether in the indian context, maintenance of price stability should be the dominant objective of monetary policy?', '4. the issue of objective has become important because of the need to provide clear guidance to monetary policy makers.', 'indeed this aspect has assumed added significance in the context of the increasing stress on autonomy of central banks.', 'while autonomy has to go with accountability, accountability itself requires a clear enunciation of goals.', '5. monetary policy has now moved to the centre stage of economic policy-making the world over.', 'in the 1930s and in the first two decades after the second world war, monetary policy was relegated to the background.', 'the ascendancy of fiscal policy during this period was due in part to the depression of the 1930s, and the process of reconstruction immediately after the second world war and the acceptance of the keynesian dictum that fiscal action was necessary to prevent deficiency in the aggregate demand.', "however, the 1970s saw the emergence of a combination of high inflation and low growth - 'stagnation' as it came to be called - and the standard keynesian analysis was hard put to explain that phenomenon.", 'consequently, monetary policy re-emerged as an instrument of economic policy particularly in the fight against inflation.', 'issues relating to the conduct of monetary policy came to the forefront of policy debates in the 1980s.', 'the relative importance of growth and price stability as the objective of monetary policy as well as the appropriate intermediate target of monetary policy became the focus of attention.', 'over the years, a consensus has emerged among the industrially advanced countries that the dominant objective of monetary policy should be price stability.', 'incorporation of this objective in the maastrischt treaty is indeed a reflection of this consensus.', 'differences however, exist among central banks even in industrially advanced countries as regards the appropriate intermediate target.', 'while some central banks consider monetary aggregates and therefore monetary targeting as operationally meaningful, some others focus exclusively on interest rate even though the inter-relationship between the two targets is well recognised.', '6. a similar trend regarding monetary policy is discernible in developing economies as well.', 'much of the early literature on development economics focused on real factors such as savings, investment and technology as main springs of growth.', 'very little attention was paid to the financial system as a contributory factor to economic growth.', 'in fact, many writers felt that inflation was endemic in the process of economic growth and it was accordingly treated more as a consequence of structural imbalance than as a monetary phenomenon.', 'however, with the accumulated evidence, it became clear that any process of economic growth in which monetary expansion was disregarded also led to inflationary pressures with a consequent impact on economic growth.', 'accordingly, importance of price stability and therefore the need to use monetary policy for that purpose also assumed importance in developing economies.', 'nonetheless, the debate on the extent to which price stability should be deemed to be the over-riding objective of monetary policy in such economies continues.', '7. monetary policy is an arm of economic policy and in that sense, the objectives of monetary policy are no different from the overall objectives of economic policy.', 'the broad objectives of monetary policy in india have been a) to regulate monetary expansion so as to maintain a reasonable degree of price stability; and b) to ensure adequate expansion in credit to assist economic growth.', 'the emphasis between the two objectives has changed from year to year depending upon the conditions prevailing in that and the previous year.', '8. the question of a dominant objective arises essentially in view of the multiplicity of objectives and the inherent conflict among such objectives.', 'jan tinbergen had argued decades ago that it was necessary to have at least one instrument for each target.', 'in this regard, it must be recognised that certain objectives are better suited or more easily achieved with certain instruments than with others.', "this 'assignment rule' favours monetary policy as the most appropriate instrument to achieve the objective of price stability.", '9. the crucial question that arises is whether the pursuit of the objective of price stability by monetary authorities undermines the ability of the economy to attain and sustain higher growth.', 'a great deal of research effort has been spent on the examination of the trade-off between economic growth and price stability.', '10. the well known phillips curve showed that there was an inverse relationship between rate of change in wage rate and unemployment rate suggesting thereby a trade-off between inflation and unemployment.', 'the original article of prof. phillips was published in 1958. the phillips curve relationship has subsequently been challenged both from theoretical and empirical standpoints.', 'the downward slope of the curve arises basically because of the presence of money illusion and expected inflation deviating from actual inflation.', "11. at present the controversy is centred around the possible short-run and long-run 'trade-off' between inflation and unemployment.", "this distinction primarily stems from the assumption of 'error-learning' process in the determination of inflationary expectations workers do have an anticipation on the inflation, but because they judge the inflation performance from the past data, the adjustment between the expected and actual inflation is slow.", 'this implies that in the short-run, nominal wage rise will not fully absorb the actual inflation, and as such, it is argued, there is scope for reducing unemployment through inflation.', "as people adjust their expectations of inflation, the short-run phillips curve shifts upward and the unemployment rate returns towards its 'natural' level.", "as the expected inflation catches up with actual inflation, the phillips curve becomes vertical, denying thereby a 'trade-off' between inflation and unemployment in the long run.", 'the phillips curve thus provides at best a temporary trade-off between inflation and unemployment when the economy is adjusting to shocks to aggregate demand and as long as expected inflation is lower than actual inflation.', 'the long-run phillips curve becomes almost vertical at the natural rate of unemployment.', "12. of course, there is a possibility of lengthening the short-run 'trade-offs' indefinitely, since inflation surprises in each period can elongate the long-run perpetually.", "but, in that case the 'trade-offs' will become sharper in each successive period.", "in other words, to maintain the unemployment below the 'natural' rate, policy authorities will have to inflate the economy at higher rates in each successive period.", 'this has a major policy implication even if the economy does not operate on the long-run vertical phillips curve.', "under the 'rational expectations hypothesis', as there are no deviations between 'actual', and 'expected' inflation, both in the short-run and long-run, phillips curves are treated as being vertical with no trade-off between inflation and unemployment.", '13. another policy related question is the shape of the short-run phillips curve itself.', 'in the real world wages and prices remain sticky, as employment contracts are fairly long and there is also a cost in changing the individual prices too often, or renegotiating wages each time after a price rise.', 'as argued by fischer (1994), the nature of stickiness in wages and prices could be different in different economies and this could also be a function of the inflation history of the country concerned.', 'countries with high inflation rates tend to find themselves on the steeper portion of the short-run phillips curve than low inflation countries which are more likely to be on the flatter side.', "therefore, 'trade-off' between price stability and employment or output even when it does exist, is sharper for countries with relatively high inflation rates than those with low inflation rates.", '14. the case of price stability as the objective of monetary policy rests on the fact that volatility in prices creates uncertainty in decision making.', 'rising prices affect savings adversely while making speculative investments more attractive.', 'the most important contribution of the financial system to an economy is its ability to augment savings and allocate resources more efficiently.', 'a regime of rising prices vitiates the atmosphere for promotion of savings and allocation of investment.', 'apart from all of these, there is also a social dimension.', 'inflation affects adversely those who have no hedges against inflation and that includes all the poorer sections of the community.', 'of course, a critical question in this context is at what level of inflation the adverse consequences begin to set in.', '15. inflation affects fiscal balance in several ways.', 'it adversely affects fiscal deficit when elasticity of expenditure to inflation is higher than that of revenue.', 'a more significant impact of inflation arises from its effect on interest rate and the dynamic sustainability of the fiscal situation.', 'high rates of inflation signal weak resolve to control inflation and imply higher expected inflation in future.', 'this gives rise to upward rigidity in nominal interest and leads to high debt service burden on the budget, thus reducing the manoeuvrability of fiscal management.', '16. it is well recognised that adverse implications of inflation are higher at high rates of inflation, while a moderate inflation rate could be manageable without implying severe costs.', 'international evidence suggests that the costs of uncertainty tend to rise in a non-linear fashion with inflation rate exceeding a threshold.', 'one important caveat in interpreting the threshold of inflation rate beyond which costs exceed benefit is the provision of inflation protection measures available in the economy, which tends to moderate the adverse implications to some extent.', 'countries with a moderate inflation rate but inadequate indexation provision may show a higher degree of sensitivity to inflation, than those with low inflation.', 'most of the industrialised countries in the recent years have moved into an inflation rate ranging between two to three per cent.', 'among the developing countries, some of the fast growing east-asian economies have in recent years not only demonstrated low inflation rates ranging between three to five per cent, but the growth rate at these inflation rates has been fairly high at around eight per cent.', '17. empirical evidence on the relationship between the inflation and growth in cross-country frameworks is somewhat inconclusive because such studies include countries with inflation rate of as low as one to two per cent as well as countries with inflation rates going beyond 200 and 300 per cent.', 'while a number of studies have concluded that the negative impact of inflation on growth is high at high rates of inflation, there is no consensus about the threshold inflation rate beyond which the negative impact becomes pronounced.', 'a study by bruno indicated that growth rates declined steeply as the inflation rate went beyond 25 per cent.', 'another study also based on cross section of countries reported that the negative effect of inflation was very pronounced and powerful at inflation rates exceeding eight per cent.', 'what the appropriate inflation threshold beyond which costs tend to exceed benefits need to be estimated for each country separately.', 'nevertheless, people worry about even moderate inflation levels because if not held in check, a little inflation can lead to higher inflation and eventually affect growth.', '18. a macro-econometric model of the indian economy shows that a 10 per cent sustained increase in real public investment in non-agriculture sector, financed by money creation leads to an annual inflation rate of about 2.3 per cent and additional gdp growth of one percent, on an average, during the first two years, while in the span of 10 to 15 years, inflation rate rises to about 17 per cent per annum and additional output growth slows down considerably to average 2.7 per cent during this period.', 'this implies that in the long run a sustained improvement in the growth scenario through monetary financing of the deficit could involve a severe trade-off in terms of inflation - every one per cent additional output growth implies nearly 6 to 6.5 per cent rise in inflation rate in the long run.', '19. obviously, there are some critics of price stability as the dominant objective of monetary policy.', "for example prof. paul krugman writes '.....the belief that absolute price stability is a huge blessing, that it brings large benefits with few if any costs, rests not on evidence but on faith.", "the evidence actually points the other way: the benefits of price stability are elusive, the costs of getting there are large, and zero inflation may not be a good thing even in the long run.'", "the observations of prof. krugman as they stand are not directed against price stability as an objective but are aimed against a policy which seeks 'absolute' price stability and attempts to bring down the inflation rate from around two per cent to almost zero.", "this is evident from what he himself advocates: '.....adopt as a long run target fairly low but not zero inflation, say threefour per cent.", 'this is high enough to accommodate most of the real wage cuts that markets impose, while the costs of the inflation itself will still be very small.', "interestingly, in india, the chakravarty committee (1985) treated an inflation rate of four per cent as 'the acceptable rise in prices' purported to reflect 'changes in relative prices necessary to attract resources to growth sectors'.", '20. we, in india, need to have an appropriate fix on the acceptable level of inflation rate.', 'in the 1970s, the average annual inflation rate as measured by the wholesale price index was nine per cent.', 'in the 1980s, it was eight per cent.', 'however, in the period between 1990 and 1995, the average inflation rate has remained around 10 per cent.', 'the objective of the policy should be to keep the inflation rate around six per cent.', 'this itself is much higher than what the industrial countries are aiming at and therefore will have some implications for the exchange rate of the rupee.', 'monetary growth should be so moderated that while meeting the objective of growth it does not push the inflation rate beyond six per cent.', '21. a question that arises in this context is whether monetary policy by itself is able to contain inflationary pressures particularly in developing economies like ours.', 'it is true that developing economies like india are subject to greater supply shocks than developed economies.', 'fluctuations in agricultural output have an important bearing on the price situation.', 'nevertheless, continuous increase in prices which is what inflation is about cannot occur unless it is sustained by a continuing increase in money supply.', 'control of the money supply has thus to play an important role in any scheme aimed at controlling inflation.', '21. the controversy over the objective of monetary policy has reached such a pitch that some have described central bankism as a religion with hard money as supreme god and inflation as devil.', 'let me however say that the commitment to a reasonable degree of price stability is not a dogma.', 'it is good economics.']
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Bimal Jalan
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Reserve Bank of India
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Governor
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India
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https://www.bis.org/review/r970115a.pdf
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M. Trichet presents the monetary policy guidelines of the Bank of France for 1997 (Central Bank Articles and Speeches, 17 Dec 96)
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BANK OF FRANCE, PRESS RELEASE, 17/12/96.
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1996-12-17 00:00:00
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M. Trichet presents the monetary policy guidelines of the Bank of France for
1997 BANK OF FRANCE, PRESS RELEASE, 17/12/96.
1. The ultimate goal of monetary policy is to ensure price stability, as required by
legislation. The objective of the Monetary Policy Council is that the increase in prices, as
measured by the consumer price index, should not exceed 2% in 1997, as in the medium term.
2. To meet this ultimate goal, the Banque de France uses two intermediate
objectives, one of which is external and the other internal:
-The objective of a stable external value of the currency: as it has been for
ten years, the stability of the franc will be maintained against the group of
the most credible currencies in the European Exchange Rate Mechanism.
-An intermediate internal growth target for the money supply as assessed
by the development of the narrow and broad monetary aggregates: in
1997, the money supply should be able to show a medium-term growth
trend of 5%. This figure is consistent with price inflation of no more than
2% and non-inflationary real GDP growth of about 2.5%, which could be
exceeded, in view of the potential for growth to catch up in the medium
term. The Monetary Policy Council has decided to simultaneously
monitor the main narrow and broad money aggregates in order to obtain a
concise estimate of all monetary developments.
3. Total domestic debt is an important indicator. It helps the Banque de France
make sure that the economy is supplied with enough financing to grow, and it enables us to track
developments in financing for businesses, households and general government simultaneously.
The Monetary Policy Council will keep a close eye on other indicators, including
all leading indicators of changes in prices, such as capacity utilization rates, production costs,
developments in incomes and commodity prices. The Monetary Policy Council will also monitor
long-term interest rates and the current account balance.
* * *
Before announcing the Council's monetary policy decisions for 1997, I would like
to discuss the results achieved in 1996.
1. The 1996 results are in line with the targets we set.
The ultimate monetary policy goal, which is price stability, was met. Businesses
delayed passing on part of the August 1995 two-point increase in the standard rate of VAT until
the beginning of 1996. The twelve-month rise in consumer prices was equal to and then above
2% during the first seven months of 1996, but subsequently fell back to 1.ó% in August and
September, once the VAT effect had disappeared. The twelve-month increase stood at 1.5% to
1.ó% in November and the latest forecasts predict a price rise of close to 1.5% for the end of
1996. The twelve-month price increase thus resumed its pre-August 1995 trend and will be less
than 2% at the end of 1996, in line with the objective set by the Monetary Policy Council.
The objective of a stable external value of the French franc vis-à-vis the most
credible currencies in the European Exchange Rate Mechanism was met.
Since the beginning of 1996, the franc has continued to move gradually closer to
its central rates against the other currencies in the European Exchange Rate Mechanism. This
firmness of the franc has gone hand in hand with the continuing overall competitiveness of the
French economy. The real effective exchange rate of the French franc has improved and exports,
as in previous years, helped to boost activity. The seasonally-adjusted current account surplus
for the first nine months of 1996 stood at almost FRF 84 billion. This was much greater than the
FRF 64 billion surplus posted for the same period of 1995. On the basis of current forecasts,
France will record the third largest current account surplus in the world for 1996.
Growth in the M3 reference aggregate, which is the reference for our internal
intermediate objective, showed a reversal in its trend. The expansion of M3 at the end of the
third quarter of 1995 was close to its medium-term growth target path of 5%, but subsequently
slowed sharply. The twelve-month increase of 4% in December 1995 gave way to a contraction
of 0.4% in October 1996, the last month for which figures are available. This reversal in the
growth of M3 was to a very great extent the result of a large-scale reallocation of investment
flows stemming from the fall in short-term interest rates since autumn 1995, which has been of
unprecedented magnitude and rapidity.
The M3-M2 aggregate, which includes assets paying money market rates of
interest, posted a twelve-month fall of 10.1 % at the end of October 1996. In response to the fall
in short-term interest rates and also a heavier tax burden on money market mutual funds,
economic agents reallocated their portfolios towards assets covered by the investment
aggregates, and particularly the Pl aggregate covering contractual savings products, including
housing saving plans. Year-on-year growth in P1 accelerated from 12.3% in December l995 to
18.5% in October 1996.
The rate of interest paid on housing savings plans has remained unchanged at
5.25% since February 1994, whereas comparable market rates have fallen sharply. This gave a
strong boost to the reallocation of investment flows. Year-on-year growth in housing savings
plans accelerated significantly, rising from 14.1% at the end of 1995 to almost 26% in October
1996.
In addition, twelve-month growth in the P2 aggregate covering investment in
bonds and life insurance products remained buoyant. It stood at 12.3% in June 1996, with new
investment accounting for 9%.
At the same time, formation of liquidity was dynamic. The narrow money
aggregates M1 and M2, which cover transaction balances and liquid savings, showed annual
growth trends in October 1996 of around 5.8% and 7.5%, respectively. In particular, the growth
of M2-M1, covering passbook savings deposits, accelerated from 7.6% in December 1995 to
9.6% in October 1996.
In such a context, it is important to monitor closely the investments which, within
the P investment aggregates, constitute fairly close substitutes for monetary assets in the strictest
sense. M3 + P1 posted significant annual growth of around 4%.
On the financing side, total domestic debt showed a yearly growth trend of around
3.3%. Total domestic debt incorporates the debt financing obtained by resident non-financial
agents in the corporate, personal and public sectors, be it in the form of borrowing from credit
institutions or debt issues on domestic or international markets, and is thus a valuable yardstick
for analyzing the financing provided to the economy. Even though government debt continues to
be the most dynamic component of total domestic debt, its twelve-month growth slowed sharply
from 13.4% in December 1995 to ó.9% in September 1996. Outstanding lending by credit
institutions to the private sector is practically stable, particularly owing to the corporate sector's
sizeable cash surplus. According to the National Institute for Statistics and Economic Studies
(INSEE), the self-financing rate of companies and near-companies stood at around 114% in the
second quarter of 1996.
I shall now make a few comments concerning interest rates, which fell across the
board in 1996.
This decline in interest rates, which began in October 1995, corresponds to a
considerable increase in confidence in the French franc and in the creditworthiness of France in
connection with the policies set forth by the President of the Republic and the Government for
the reduction of government deficits, the stability of the franc and Monetary Union in 1999. In
1996, the Banque de France's repurchase tender rate was cut from 4.45% to 3.2% today. It is one
of the lowest rates in the G7 countries in both nominal and real terms. The five-to-ten-day repo
rate fell from 5.85% to 4.75%.
Short-term market rates eased substantially, with three-month rates shedding
almost 400 basis points since October 1995 and currently standing at around 3.4%.
The easing in short-term rates went hand in hand with a significant decline in
long-term rates, which are the reference for a large share of lending to the private sector.
Ten-year rates have fallen by more than 100 basis points since October 1995.
Thanks to the credibility of every component of its economic policy, France today
enjoys the lowest medium- and long-term market rates in the European Union, and the third
lowest rates in the world, bettered only by Japan and Switzerland.
This brings me to the monetary policy decisions for 1997.
1.
The ultimate goal of monetary policy is to ensure price stability, as
required by legislation. The objective of the Monetary Policy Council is that the increase in
2% in 1997. as in the
prices, as measured by the consumer price index, should not exceed
medium term.
2.
To meet this ultimate goal, the Banque de France uses two intermediate
one of which is external and the other internal:
objectives,
-The objective of a stable external value of the currency: as it has been for
ten years, the stability of the franc will be maintained against the group of
the most credible currencies in the European Exchange Rate Mechanism.
-An intermediate internal growth target for the money supply assessed
in
by the development of the narrow and broad monetary aggregates:
1997, the money supply should be able to show a medium-term growth
trend of 5%. This figure is consistent with price inflation of no more than
2% and non-inflationary real GDP growth of about 2.5%, which could be
exceeded, in view of the potential for growth to catch up in the medium
term. The Monetary Policy Council has decided to simultaneously
monitor the main narrow and broad money aggregates in order to obtain a
concise estimate of all monetary developments.
3. Total domestic debt is an important indicator. It helps the Banque de France
make sure that the economy is supplied with enough financing to grow, and it enables us to track
developments in financing for businesses, households and general government simultaneously.
The Monetary Policy Council will keep a close eye on other indicators, including
all leading indicators of changes in prices, such as capacity utilization rates, production costs,
developments in incomes and commodity prices. The Monetary Policy Council will also monitor
and the
long-term interest rates current account balance.
*
* *
These decisions call for two remarks.
First, on a technical level, the Monetary Policy Council has decided to monitor
several narrow and broad money aggregates simultaneously in order to obtain a concise estimate
of all monetary developments. As we have seen, certain data, and particularly, but not
exclusively, M3 data, have been severely disrupted recently by several factors, such as the very
substantial fall in short-term rates and the ensuing large-scale reallocation of investment flows
towards non-monetary assets, higher taxes on money market mutual funds, and the continuing
very high level of interest paid on housing saving plans.
We will therefore keep a very close eye on the M1, M2, M3, and M3+P1
aggregates as expressions of the underlying growth of the money supply. Particular attention
will be paid to the growth of the M3+P1 aggregate covering monetary assets and contractual
savings.
A very large proportion of the outflows from M3 in the past year was directed
towards investments covered by P1, and particularly housing savings plans with a residual
maturity of one year or less. In fact, this type of investment at present constitutes a very close
substitute for monetary assets.
Second, the Monetary Policy Council has set monetary policy against the
background of potential growth for the French economy of around 2.5% per year. We consider
the average growth of our economy in the medium-term, and it could be exceeded given that we
have a potential to catch up in the medium term. We reckoned with a maximum price increase of
2% and potential real growth of between 2.5% and 3% in the medium term to arrive at a figure
of 5% for the medium-term growth trend of the money supply.
*
* *
It is very important to bear in mind the essence of the policy implemented by the
Monetary Policy Council.
Parliament confers on the Banque de France an objective, namely the objective of
price stability. Maintaining the value of the currency preserves the purchasing power of the
currency, and therefore that of French citizens.
In addition, Parliament has sought to create the conditions for growth and for job
creation, via the stability of the currency. This is also the goal of the Monetary Policy Council.
To achieve this goal, we use two means.
First, by preserving the value of the currency, we enhance its credibility in
France, in Europe and in the world and allow our economy to benefit from financing at
favourable market interest rates. It is very important for future French growth, for investment
and for job creation that we have the lowest medium- and long-term market rates in the
European Union today and the third lowest interest rates in the world.
Second, price stability curbs cost increases in our productive sector. In doing so,
the competitiveness of our economy-other things being equal-is preserved and enhanced.
This is good for future French growth and for job creation. It is important to note that we
currently have a dynamic export sector and, according to the latest forecasts for 1996, the third
highest current account surplus in the world.
One other indicator of competitiveness is encouraging, namely the flow of foreign
direct investment into France. It stood at FRF 120 billion in 1995. The latest figures for the first
nine months of 1996 show inward foreign direct investment totalling FRF 74 billion. In all,
since the beginning of 1995, a total of FRF 194 billion, the equivalent of USD 39 billion, has
been invested directly in France, making us the third-ranking industrialized economy in terms of
inward foreign direct investment, behind the United States and the United Kingdom.
Thus, when the Monetary Policy Council makes interest-rate decisions, it bears in
mind first the objective of preserving the purchasing power of the currency, for and on behalf of
all French people, and second, its corollary, namely the creation of monetary, financial and
competitive conditions that will allow our economy to achieve its full potential for sound and
sustained growth, for job creation and therefore for combating unemployment.
Central Banks cannot "command" growth. Growth is the fruit of the labour of
men and women, of the efficiency of employees, workers and engineers, of the imagination and
skill of business leaders, and also, more broadly, of the influence of European and international
business conditions. It is stimulated, in the medium and long term, by structural reforms that
liberate initiative, strengthen the dynamism of the economy, combat unemployment effectively
and encourage the creation of the greatest possible number of jobs for a given level of wealth
and growth.
However, it is up to Central Banks to create the best possible monetary and
financial conditions, through the credibility and stability of the currency.
These conditions now exist in our country and the Monetary Policy Council is
convinced that the time has come for firms and households to invest. In many sectors and firms,
the financing exists. The self-financing rate of the entire French productive sector is above 100%
overall. Interest rates as a whole are at historic lows. The French economy has substantial
potential for growth in the medium term. In the last three years, potential growth has averaged a
little more than 2% a year for the years 1994, 1995 and 1996. We can do better. We believe that
our economy's potential non-inflationary growth is around 2.5% in the medium term, and this
can be exceeded given the capacity for growth to catch up. The requirements for investment are
financing terms, self-financing, competitiveness, and medium-term growth. We believe these
requirements exist today.
If I had to sum up briefly the message of the Monetary Policy Council, I would
say: "The investment plans exist. The time has come today to implement them. Let us invest. It
is the surest way for us to contribute to non-inflationary growth that creates jobs and thus to help
in the fight against unemployment."
*
* *
French monetary policy is in line with the European strategy of the President of
the Republic and the Government, and therefore with the creation of an economic and monetary
union on 1 January 1996.
The advance towards the single currency was decisively confirmed at the
European Summit in Dublin, where an agreement was reached on the legal status of the euro, on
the new European Monetary System and on the stability and growth pact intended to guarantee
fiscal discipline in the Monetary Union.
The Banque de France's monetary policy contributes directly to our country's
success in meeting three of the five criteria for entry into Monetary Union: the criterion of price
stability, which is the ultimate goal of our monetary policy; that of the stability of the franc
visà-vis the most solid European currencies, which is an intermediate objective to which the
Banque de France is steadfastly committed, and that of the level of long-term interest rates,
which is a result and an important indicator of our monetary strategy.
l) Today, the Monetary Policy Council is happy to note that we fully meet these
three entry criteria. The Council will continue to make sure that we abide by them throughout
1997 so that the Heads of State and Government can draw up the list of countries eligible for the
euro in the best possible conditions, in accordance with the terms of the Dublin decision of the
Heads of State and Government, "as soon as possible in 1998".
The euro will be created on 1 January 1999. Our market interest rates on
maturities of more than two years already incorporate the credibility and soundness of the euro,
the future single currency of European citizens. The agreement on the stability and growth pact
drawn up in Dublin is a decisive element in inspiring confidence in the euro in French citizens
and investors from around the world that is at least equal to the confidence in the French franc.
This will give us low market interest rates in the euro area, which is good for growth, job
creation and the fight against unemployment.
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['m. trichet presents the monetary policy guidelines of the bank of france for 1997 bank of france, press release, 17/12/96.', '1. the ultimate goal of monetary policy is to ensure price stability, as required by legislation.', 'the objective of the monetary policy council is that the increase in prices, as measured by the consumer price index, should not exceed 2% in 1997, as in the medium term.', '2. to meet this ultimate goal, the banque de france uses two intermediate objectives, one of which is external and the other internal: -the objective of a stable external value of the currency: as it has been for ten years, the stability of the franc will be maintained against the group of the most credible currencies in the european exchange rate mechanism.', '-an intermediate internal growth target for the money supply as assessed by the development of the narrow and broad monetary aggregates: in 1997, the money supply should be able to show a medium-term growth trend of 5%.', 'this figure is consistent with price inflation of no more than 2% and non-inflationary real gdp growth of about 2.5%, which could be exceeded, in view of the potential for growth to catch up in the medium term.', 'the monetary policy council has decided to simultaneously monitor the main narrow and broad money aggregates in order to obtain a concise estimate of all monetary developments.', '3. total domestic debt is an important indicator.', 'it helps the banque de france make sure that the economy is supplied with enough financing to grow, and it enables us to track developments in financing for businesses, households and general government simultaneously.', 'the monetary policy council will keep a close eye on other indicators, including all leading indicators of changes in prices, such as capacity utilization rates, production costs, developments in incomes and commodity prices.', 'the monetary policy council will also monitor long-term interest rates and the current account balance.', "* * * before announcing the council's monetary policy decisions for 1997, i would like to discuss the results achieved in 1996.", '1. the 1996 results are in line with the targets we set.', 'the ultimate monetary policy goal, which is price stability, was met.', 'businesses delayed passing on part of the august 1995 two-point increase in the standard rate of vat until the beginning of 1996. the twelve-month rise in consumer prices was equal to and then above 2% during the first seven months of 1996, but subsequently fell back to 1.ó% in august and september, once the vat effect had disappeared.', 'the twelve-month increase stood at 1.5% to 1.ó% in november and the latest forecasts predict a price rise of close to 1.5% for the end of 1996. the twelve-month price increase thus resumed its pre-august 1995 trend and will be less than 2% at the end of 1996, in line with the objective set by the monetary policy council.', 'the objective of a stable external value of the french franc vis-à-vis the most credible currencies in the european exchange rate mechanism was met.', 'since the beginning of 1996, the franc has continued to move gradually closer to its central rates against the other currencies in the european exchange rate mechanism.', 'this firmness of the franc has gone hand in hand with the continuing overall competitiveness of the french economy.', 'the real effective exchange rate of the french franc has improved and exports, as in previous years, helped to boost activity.', 'the seasonally-adjusted current account surplus for the first nine months of 1996 stood at almost frf 84 billion.', 'this was much greater than the frf 64 billion surplus posted for the same period of 1995. on the basis of current forecasts, france will record the third largest current account surplus in the world for 1996. growth in the m3 reference aggregate, which is the reference for our internal intermediate objective, showed a reversal in its trend.', 'the expansion of m3 at the end of the third quarter of 1995 was close to its medium-term growth target path of 5%, but subsequently slowed sharply.', 'the twelve-month increase of 4% in december 1995 gave way to a contraction of 0.4% in october 1996, the last month for which figures are available.', 'this reversal in the growth of m3 was to a very great extent the result of a large-scale reallocation of investment flows stemming from the fall in short-term interest rates since autumn 1995, which has been of unprecedented magnitude and rapidity.', 'the m3-m2 aggregate, which includes assets paying money market rates of interest, posted a twelve-month fall of 10.1 % at the end of october 1996. in response to the fall in short-term interest rates and also a heavier tax burden on money market mutual funds, economic agents reallocated their portfolios towards assets covered by the investment aggregates, and particularly the pl aggregate covering contractual savings products, including housing saving plans.', 'year-on-year growth in p1 accelerated from 12.3% in december l995 to 18.5% in october 1996. the rate of interest paid on housing savings plans has remained unchanged at 5.25% since february 1994, whereas comparable market rates have fallen sharply.', 'this gave a strong boost to the reallocation of investment flows.', 'year-on-year growth in housing savings plans accelerated significantly, rising from 14.1% at the end of 1995 to almost 26% in october 1996. in addition, twelve-month growth in the p2 aggregate covering investment in bonds and life insurance products remained buoyant.', 'it stood at 12.3% in june 1996, with new investment accounting for 9%.', 'at the same time, formation of liquidity was dynamic.', 'the narrow money aggregates m1 and m2, which cover transaction balances and liquid savings, showed annual growth trends in october 1996 of around 5.8% and 7.5%, respectively.', 'in particular, the growth of m2-m1, covering passbook savings deposits, accelerated from 7.6% in december 1995 to 9.6% in october 1996. in such a context, it is important to monitor closely the investments which, within the p investment aggregates, constitute fairly close substitutes for monetary assets in the strictest sense.', 'm3 + p1 posted significant annual growth of around 4%.', 'on the financing side, total domestic debt showed a yearly growth trend of around 3.3%.', 'total domestic debt incorporates the debt financing obtained by resident non-financial agents in the corporate, personal and public sectors, be it in the form of borrowing from credit institutions or debt issues on domestic or international markets, and is thus a valuable yardstick for analyzing the financing provided to the economy.', "even though government debt continues to be the most dynamic component of total domestic debt, its twelve-month growth slowed sharply from 13.4% in december 1995 to ó.9% in september 1996. outstanding lending by credit institutions to the private sector is practically stable, particularly owing to the corporate sector's sizeable cash surplus.", "according to the national institute for statistics and economic studies (insee), the self-financing rate of companies and near-companies stood at around 114% in the second quarter of 1996. i shall now make a few comments concerning interest rates, which fell across the board in 1996. this decline in interest rates, which began in october 1995, corresponds to a considerable increase in confidence in the french franc and in the creditworthiness of france in connection with the policies set forth by the president of the republic and the government for the reduction of government deficits, the stability of the franc and monetary union in 1999. in 1996, the banque de france's repurchase tender rate was cut from 4.45% to 3.2% today.", 'it is one of the lowest rates in the g7 countries in both nominal and real terms.', 'the five-to-ten-day repo rate fell from 5.85% to 4.75%.', 'short-term market rates eased substantially, with three-month rates shedding almost 400 basis points since october 1995 and currently standing at around 3.4%.', 'the easing in short-term rates went hand in hand with a significant decline in long-term rates, which are the reference for a large share of lending to the private sector.', 'ten-year rates have fallen by more than 100 basis points since october 1995. thanks to the credibility of every component of its economic policy, france today enjoys the lowest medium- and long-term market rates in the european union, and the third lowest rates in the world, bettered only by japan and switzerland.', 'this brings me to the monetary policy decisions for 1997.', '1. the ultimate goal of monetary policy is to ensure price stability, as required by legislation.', 'the objective of the monetary policy council is that the increase in 2% in 1997. as in the prices, as measured by the consumer price index, should not exceed medium term.', '2. to meet this ultimate goal, the banque de france uses two intermediate one of which is external and the other internal: objectives, -the objective of a stable external value of the currency: as it has been for ten years, the stability of the franc will be maintained against the group of the most credible currencies in the european exchange rate mechanism.', '-an intermediate internal growth target for the money supply assessed in by the development of the narrow and broad monetary aggregates: 1997, the money supply should be able to show a medium-term growth trend of 5%.', 'this figure is consistent with price inflation of no more than 2% and non-inflationary real gdp growth of about 2.5%, which could be exceeded, in view of the potential for growth to catch up in the medium term.', 'the monetary policy council has decided to simultaneously monitor the main narrow and broad money aggregates in order to obtain a concise estimate of all monetary developments.', '3. total domestic debt is an important indicator.', 'it helps the banque de france make sure that the economy is supplied with enough financing to grow, and it enables us to track developments in financing for businesses, households and general government simultaneously.', 'the monetary policy council will keep a close eye on other indicators, including all leading indicators of changes in prices, such as capacity utilization rates, production costs, developments in incomes and commodity prices.', 'the monetary policy council will also monitor and the long-term interest rates current account balance.', '* * * these decisions call for two remarks.', 'first, on a technical level, the monetary policy council has decided to monitor several narrow and broad money aggregates simultaneously in order to obtain a concise estimate of all monetary developments.', 'as we have seen, certain data, and particularly, but not exclusively, m3 data, have been severely disrupted recently by several factors, such as the very substantial fall in short-term rates and the ensuing large-scale reallocation of investment flows towards non-monetary assets, higher taxes on money market mutual funds, and the continuing very high level of interest paid on housing saving plans.', 'we will therefore keep a very close eye on the m1, m2, m3, and m3+p1 aggregates as expressions of the underlying growth of the money supply.', 'particular attention will be paid to the growth of the m3+p1 aggregate covering monetary assets and contractual savings.', 'a very large proportion of the outflows from m3 in the past year was directed towards investments covered by p1, and particularly housing savings plans with a residual maturity of one year or less.', 'in fact, this type of investment at present constitutes a very close substitute for monetary assets.', 'second, the monetary policy council has set monetary policy against the background of potential growth for the french economy of around 2.5% per year.', 'we consider the average growth of our economy in the medium-term, and it could be exceeded given that we have a potential to catch up in the medium term.', 'we reckoned with a maximum price increase of 2% and potential real growth of between 2.5% and 3% in the medium term to arrive at a figure of 5% for the medium-term growth trend of the money supply.', '* * * it is very important to bear in mind the essence of the policy implemented by the monetary policy council.', 'parliament confers on the banque de france an objective, namely the objective of price stability.', 'maintaining the value of the currency preserves the purchasing power of the currency, and therefore that of french citizens.', 'in addition, parliament has sought to create the conditions for growth and for job creation, via the stability of the currency.', 'this is also the goal of the monetary policy council.', 'to achieve this goal, we use two means.', 'first, by preserving the value of the currency, we enhance its credibility in france, in europe and in the world and allow our economy to benefit from financing at favourable market interest rates.', 'it is very important for future french growth, for investment and for job creation that we have the lowest medium- and long-term market rates in the european union today and the third lowest interest rates in the world.', 'second, price stability curbs cost increases in our productive sector.', 'in doing so, the competitiveness of our economy-other things being equal-is preserved and enhanced.', 'this is good for future french growth and for job creation.', 'it is important to note that we currently have a dynamic export sector and, according to the latest forecasts for 1996, the third highest current account surplus in the world.', 'one other indicator of competitiveness is encouraging, namely the flow of foreign direct investment into france.', 'it stood at frf 120 billion in 1995. the latest figures for the first nine months of 1996 show inward foreign direct investment totalling frf 74 billion.', 'in all, since the beginning of 1995, a total of frf 194 billion, the equivalent of usd 39 billion, has been invested directly in france, making us the third-ranking industrialized economy in terms of inward foreign direct investment, behind the united states and the united kingdom.', 'thus, when the monetary policy council makes interest-rate decisions, it bears in mind first the objective of preserving the purchasing power of the currency, for and on behalf of all french people, and second, its corollary, namely the creation of monetary, financial and competitive conditions that will allow our economy to achieve its full potential for sound and sustained growth, for job creation and therefore for combating unemployment.', 'central banks cannot "command" growth.', 'growth is the fruit of the labour of men and women, of the efficiency of employees, workers and engineers, of the imagination and skill of business leaders, and also, more broadly, of the influence of european and international business conditions.', 'it is stimulated, in the medium and long term, by structural reforms that liberate initiative, strengthen the dynamism of the economy, combat unemployment effectively and encourage the creation of the greatest possible number of jobs for a given level of wealth and growth.', 'however, it is up to central banks to create the best possible monetary and financial conditions, through the credibility and stability of the currency.', 'these conditions now exist in our country and the monetary policy council is convinced that the time has come for firms and households to invest.', 'in many sectors and firms, the financing exists.', 'the self-financing rate of the entire french productive sector is above 100% overall.', 'interest rates as a whole are at historic lows.', 'the french economy has substantial potential for growth in the medium term.', 'in the last three years, potential growth has averaged a little more than 2% a year for the years 1994, 1995 and 1996. we can do better.', "we believe that our economy's potential non-inflationary growth is around 2.5% in the medium term, and this can be exceeded given the capacity for growth to catch up.", 'the requirements for investment are financing terms, self-financing, competitiveness, and medium-term growth.', 'we believe these requirements exist today.', 'if i had to sum up briefly the message of the monetary policy council, i would say: "the investment plans exist.', 'the time has come today to implement them.', 'it is the surest way for us to contribute to non-inflationary growth that creates jobs and thus to help in the fight against unemployment."', '* * * french monetary policy is in line with the european strategy of the president of the republic and the government, and therefore with the creation of an economic and monetary union on 1 january 1996. the advance towards the single currency was decisively confirmed at the european summit in dublin, where an agreement was reached on the legal status of the euro, on the new european monetary system and on the stability and growth pact intended to guarantee fiscal discipline in the monetary union.', "the banque de france's monetary policy contributes directly to our country's success in meeting three of the five criteria for entry into monetary union: the criterion of price stability, which is the ultimate goal of our monetary policy; that of the stability of the franc visà-vis the most solid european currencies, which is an intermediate objective to which the banque de france is steadfastly committed, and that of the level of long-term interest rates, which is a result and an important indicator of our monetary strategy.", 'l) today, the monetary policy council is happy to note that we fully meet these three entry criteria.', 'the council will continue to make sure that we abide by them throughout 1997 so that the heads of state and government can draw up the list of countries eligible for the euro in the best possible conditions, in accordance with the terms of the dublin decision of the heads of state and government, "as soon as possible in 1998".', 'the euro will be created on 1 january 1999. our market interest rates on maturities of more than two years already incorporate the credibility and soundness of the euro, the future single currency of european citizens.', 'the agreement on the stability and growth pact drawn up in dublin is a decisive element in inspiring confidence in the euro in french citizens and investors from around the world that is at least equal to the confidence in the french franc.', 'this will give us low market interest rates in the euro area, which is good for growth, job creation and the fight against unemployment.']
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Bank of France
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Banque de France
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Governor
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France
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https://www.bis.org/review/r970108c.pdf
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Mr. Davies gives his personal view of EMU (Central Bank Articles and Speeches, 16 Dec 96)
| "Speech by the Deputy Governor of the Bank of England, Mr. Howard Davies, at the EFMA Conference on (...TRUNCATED) |
1996-12-16 00:00:00
| "Speech by the Deputy Governor\nMr. Davies gives his personal view of EMU\nof the Bank of England, M(...TRUNCATED) | "['speech by the deputy governor mr. davies gives his personal view of emu of the bank of england, m(...TRUNCATED) |
Mervyn King
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Bank of England
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Deputy Governor
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UK
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https://www.bis.org/review/r970108b.pdf
| "Ms. Rivlin discusses the prudential regulation of banks and how to improve it (Central Bank Articl(...TRUNCATED) | "Remarks by the Vice Chairman of the Board of Governors of the US Federal Reserve System, Ms. Alice (...TRUNCATED) |
1996-12-19 00:00:00
| "Ms. Rivlin discusses the prudential regulation of banks and how to improve\nit Remarks by the Vice (...TRUNCATED) | "['ms. rivlin discusses the prudential regulation of banks and how to improve it remarks by the vice(...TRUNCATED) |
Alice M Rivlin
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Board of Governors of the US Federal Reserve System
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Vice Chairman of the Board of Governors
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US
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https://www.bis.org/review/r970107b.pdf
| "Bank of Japan's December review of monetary and economic trends in Japan (Central Bank Articles an(...TRUNCATED) |
BANK OF JAPAN, MONTHLY ECONOMIC REVIEW, 20/12/96.
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1996-12-20 00:00:00
| "Bank of Japan's December review of monetary and economic trends in Japan\nBANK OF JAPAN, MONTHLY EC(...TRUNCATED) | "[\"bank of japan's december review of monetary and economic trends in japan bank of japan, monthly (...TRUNCATED) |
Bank of Japan
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Bank of Japan
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Governor
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Japan
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https://www.bis.org/review/r970107a.pdf
| "Mr. Matsushita considers the role of monetary policy in Japan (Central Bank Articles and Speeches,(...TRUNCATED) | "Translated excerpts of a speech given by the Governor of the Bank of Japan, Mr. Yasuo Matsushita, a(...TRUNCATED) |
1996-11-06 00:00:00
| "Mr. Matsushita considers the role of monetary policy in Japan Translated\nexcerpts of a speech give(...TRUNCATED) | "['mr. matsushita considers the role of monetary policy in japan translated excerpts of a speech giv(...TRUNCATED) |
Yasuo Matsushita
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Bank of Japan
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Governor
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Japan
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https://www.bis.org/review/r970106.pdf
| "Prof. Tietmeyer discusses the Bundesbank's commitment to stability (Central Bank Articles and Spee(...TRUNCATED) | "Translation of an article by the President of the Deutsche Bundesbank, Prof. Hans Tietmeyer, publis(...TRUNCATED) |
1996-12-28 00:00:00
| "Prof. Tietmeyer discusses the Bundesbank's commitment to stability\nTranslation of an article by Pr(...TRUNCATED) | "[\"prof. tietmeyer discusses the bundesbank's commitment to stability translation of an article by (...TRUNCATED) |
Hans Tietmeyer
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Deutsche Bundesbank
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President
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Germany
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BIS Speeches NER dataset is a large-scale annotated dataset of central bank speeches (1996–2024) curated for Named Entity Recognition (NER).
It was developed to support the fine-tuning of Central Bank BERT
and related models for extracting structured metadata from central bank communication.
Each row corresponds to a single central bank speech record with the following fields:
Column | Type | Description |
---|---|---|
url | string |
Direct BIS link to the PDF of the speech. |
title | string |
Short title of the speech as listed in the BIS archive. |
description | string |
Concise description of the speech, typically including the speaker’s name, role, and affiliation. |
date | datetime |
Date of the speech. |
text | string |
Full text of the speech. |
processed_text | list[string] |
Pre-processed sentence-level text (tokenized, normalized, lowercased). |
author | string |
Name of the speech author or speaker. |
affiliation | string |
Institution or central bank associated with the speaker (e.g., People’s Bank of China, European Central Bank). |
position | string |
Official role or title of the speaker (e.g., Governor, Deputy Governor). |
country | string |
Country corresponding to the affiliation. |
AUTHOR
, POSITION
, AFFILIATION
).This hybrid manual + machine-assisted annotation approach enabled efficient, large-scale dataset creation while maintaining high quality.
{
"tokens": ["speech", "by", "mr", "yi", "gang", ",", "governor", "of", "the", "people", "'s", "bank", "of", "china"],
"ner_tags": ["O", "O", "B-AUTHOR", "I-AUTHOR", "I-AUTHOR", "O",
"B-POSITION", "O", "O", "B-AFFILIATION", "I-AFFILIATION",
"I-AFFILIATION", "I-AFFILIATION", "I-AFFILIATION"]
}
If you use this dataset, please cite:
@dataset{zafar2025centralbankner,
author = {Zafar, M.B.},
title = {BIS Speeches NER dataset},
year = {2025},
publisher = {Hugging Face},
url = {https://huggingface.co/datasets/bilalzafar/BIS-Speeches-NER-dataset}
}