Prof. Kurien on China’s Financial System

Professor Jacob Kurien

Professor Jacob Kurien


NANJING — Recently The SAIS Observer sat down with Jacob Kurien, a professor of International Economics at the Hopkins-Nanjing Center, to discuss China’s financial liberalization. Before coming to the HNC, Professor Kurien completed his PhD in Rural Banking and Microfinance at the University of Madras in India. In addition, he was a Fulbright Scholar teaching International Economics at the University of Peradaniya in Sri Lanka.

Historically, China’s financial system has allowed individuals to focus more on investment, and allowed for a larger amount of household savings. However, as the country is currently undergoing a transition from an investment-led economy to a consumption-led economy, there is a need for more sustainable services within the country. One way this is being done is by implementing reforms from Xi Jinping and Li Keqiang, and reforms of Chinese monetary policy. What are your thoughts?

The policy reform is part of implementing a reform of the financial sector and integration to the global economy. One condition for the RMB to be considered as an international reserve currency is that it becomes a fully convertible currency. However, with this come many inherent dangers, one being the potential outflow of money. To prevent this, the government is now working towards ensuring the liberalization of the financial system in a sequential and gradual manner. In addition, the economic transformation in China is currently not being hastened and is conforming to the axiom and prudent advice given by Deng Xiaoping. This is being followed by first ensuring that trade and capital accounts are opened up, as well as having both the interest and exchange rates determined by the market. Hence, there are two stages here, one that the RMB should gradually become an international reserve currency, which is currently used mostly for trade purposes. Secondly, the gradual liberalization of the financial market so as to significantly impact the role and status of the RMB as a reserve currency.

How would financial market liberalization affect the RMB as the world’s reserve currency?

The fact remains that the conditions sought today for a reserve currency such as the U.S. Dollar and the Japanese Yen is that it become fully convertible on the capital account, defined by the ability of the currency to be both freely bought and sold. Among the ten largest currency transactions going on globally, the Chinese RMB is one of the very few which does not meet this criteria. Moreover, if the RMB is to successfully transition to a global reserve currency, it should not be state controlled. Thus, a thorough reform of the financial market system, including exchange rates, interest rates, and stock prices, must be implemented. That being said, China is in a favorable position to use past experiences of other countries, and revert to an institutional view and open up its economy befitting the characteristics and needs of their own economy.

With these reforms, some China watchers argue that the Chinese have their own method of quantitative easing. If these arguments are true, what type of long-term effects could this have on the economic and political structure, both domestic and abroad?

When one looks at the current monetary system it is not a system which grants autonomy to the People’s Bank of China (PBC) in order to conduct independent monetary policy. It is unable to act similarly to other central banks such as the Fed in the United States, because those banks are quasi-independent, something that the PBC does not represent today. Therefore, the exchange rate- currently a managed float- is officially administered, and as a result it is not to attain a global status. However, over the years interest rates and deposit rates have become more flexible, which shows the state is loosening its grip. Thus, if this transition continues and it is going in the direction of making the RMB an international currency, it would be in a time lapse prior to which it would have to liberalize interest rates, capital markets and become more open to investments. However, political aspirations are always tied to the financial policy issues, because China cannot afford to take any policy action which would be globally welcomed, but detrimental to the domestic needs of the country.