PBoC Governor Zhou’s Warning

Below and attached are comments about a warning. These do not usually get into Western media. I think the timing of this reconfirms my view that China was ready for a speculative assault when they opened the HK-Shanghai corridor and it did happen. They did defeat it but clearly it has put them on alert going forward.


Our financial capitalism is not what China wants to use its stock markets for. They want their stock markets to support production, governance and dividend flows.


They will also use it for restructuring and governance of the economy, but it will not be a centre for speculation. Our stock markets have become focused on hedge fund type activity and speculative interests. Out stage of financial capitalism is a long way beyond China’s stage of development, and may be beyond their long term objectives.


I often hear people say but China did not tell us – I reply they do we just do not read it.


One world two systems evolving and cooperating


On behalf of Dr. Jianguang Shen:

China Economics Weekly 151204

PBoC Governor Zhou’s Warning

An article published by PBoC governor Zhou Xiaochuan last week attracted wide attention in China. In the article, the governor opined that China must build a more effective financial security system to deal with possible “overseas speculative attacks or sanctions.”

We view Governor Zhou’s warning as a serious one. Although he neither indicates any specific speculative attack or sanction at present, nor suggests any near-term risks, his article has shown that the Chinese policy makers are really concerned about: 1) risks associated with capital account liberalisation; and 2) challenges that China faces in managing the Sino-US relation as the only possible financial sanction would come from the US.

History and data suggest there is some correlation between capital account liberalisation, speculative attack and financial crisis. Therefore, renminbi convertibility requires well-designed supervision and protection. Although we believe China’s capital account is in the process of opening up, we note that China will adopt a concept of “managed convertibility” and retain certain capital account control to reduce potential risks.

We also note that there has been a change in the balance of power between China and the US since the US recovery over the past 1-2 years. A few cases of friction between the two countries have occurred in recent months as well. We believe the likelihood of the US imposing financial sanctions against China is quite low. However, Governor Zhou’s article suggests that China should prepare carefully for even tail risks.

The IMF has officially decided to include the renminbi in the Special Drawing Rights (SDR) as the fifth reserve currency. This is in line with a view we have held since 2011. We believe the decision is an important milestone, representing:  1) an important development in the international monetary system; 2) recognition of financial reform in China.


Jianguang Shen Mizuho Securities Asia Limited


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