Lou Jiwei

Lou Jiwei is an important figure in China’s fiscal and financial sectors. He served as chairman and chief executive officer of China Investment Corporation (CIC) from September 2007 to March 2013, and as Minister of Finance from March 2013 to November 2016.

From October 2010, CICC held receptions around the world to celebrate its 15th anniversary, successively in New York, Beijing, Shanghai and Hong Kong. According to media reports, the Beijing reception had an impressive line-up of attendees, including Beijing mayor Guo Jinlong, central bank governor Zhou Xiaochuan, and then CIC chairman Lou Jiwei.

On 12 December 2020, at the Sanya Caijing International Forum, Wang Boming, editor-in-chief of Caijing magazine, held a dialogue with former Minister of Finance Lou Jiwei and Bridgewater founder Ray Dalio. Dalio took part remotely by video from the United States; he judged that 2020 would be remembered as a year of transition, from which the importance of China’s and the United States’ capital markets and the status of their reserve currencies would begin to be established. Lou Jiwei said that China’s rise is peaceful and that China is itself a major country; he felt Dalio had rated China too highly, and that China was still quite far from the status of a global financial centre and reserve-currency country. He said that in 2018 President Xi Jinping had proposed substantial financial opening at the Boao Forum for Asia, after which financial opening accelerated, with the opening of investment and trade especially marked in the past year or two; he regarded 2020 as a turning point, a year in which large amounts of cross-border investment flowed into China, including mainland funds investing in Hong Kong and international investment entering China, and allocations involving liquidity were expanding. But he believed it was still too early to say when China would become a financial centre and a true reserve-currency country; this would require full opening of the renminbi capital account, for which conditions did not yet exist, and it would be rather hard to achieve. He also noted that the United States, with extremely loose monetary policy and extremely high debt, had lost reserve-currency status, but that China’s monetary policy had also been very loose in response to the pandemic and its debt ratio had risen, with the macro leverage ratio climbing from over 240% the previous year to over 260%, and it was in the process of deleveraging; China also had a widening wealth gap, which it was trying to address; China too had its own weaknesses and needed to stay clear-headed.

On the phenomenon of major economies around the world monetising large fiscal deficits without triggering large-scale inflation, Lou Jiwei said that massive money issuance had not caused inflation but instead supported debt issuance, with companies issuing bonds and national treasuries also issuing debt heavily, giving rise to the so-called problem of deficit monetisation; it seemed that deficit monetisation had become normal and harmless, and the old theory of monetary policy was being overturned. He personally firmly opposed deficit monetisation understood as the treasury directly overdrawing from the central bank, which he considered illegal. He explained that the absence of inflation was largely because the inflation took the form of rising asset prices rather than rising prices of goods and services, which was related to the long-standing practice of mixed financial operations around the world: the liquidity released by monetary policy gave financial institutions enormous room to increase leverage, showing up first as rising financial asset prices and then as rising property prices; in this situation the income distribution gap widened, and those who had no money to enter financial markets in effect became victims.

On the question of how monetary policy should return to normal, Lou Jiwei believed that if the pandemic were fully brought under control next year, the extremely loose monetary policy would have to be withdrawn and fiscal policy would also gradually be scaled back, but how to withdraw was a rather big question; at present a period of debt accumulation coincided with a period of economic recession, whereas in the past debt accumulation had coincided with economic booms, and if monetary policy were withdrawn improperly at this point it would trigger some risks, especially when asset prices were already too high.

In the same dialogue, on China-US relations, Lou Jiwei pointed out that some of the policies adopted by the US government defied common sense; for example, as a reserve-currency country, the United States’ ultra-low savings rate was inevitably accompanied by a trade deficit, yet the US government insisted that trade must be balanced, which was impossible. The Trump administration had kept waging trade wars with other countries, with China as its biggest trade-war counterpart, but after years of trade war the US trade deficit had not narrowed and was instead still widening. He also mentioned that when the pandemic broke out early that year, China quickly took effective measures and shared its experience with other countries, but the United States mocked China and emphasised bringing manufacturing back to America; by March, the pandemic inside the United States was growing ever more severe, and the US side not only failed to respond effectively but politicised the pandemic, and the resulting shock to capital markets was plain to see, with US stocks triggering circuit breakers three times. On China-US relations after the Biden administration took office, Lou Jiwei believed that establishing effective, frank communication was very necessary; some of the officials chosen by the Biden administration were people one could communicate well with, and if you explained things more clearly than they did and they thought you were right, they would cooperate with you. The Biden administration’s arrival might restore the earlier tradition of good communication between the two sides, but because many nominal barriers had already been created, it was hard to say the burden already taken on could easily be shaken off.

On global investment allocation for 2021, Lou Jiwei advocated diversification, increasing allocations to East Asia in addition to developed-country assets. He believed East Asia was the best-performing region during the pandemic, and that China, as the only major country to achieve positive growth that year, could pull East Asia as a whole into positive growth. In addition, the spillover shock to East Asia from the withdrawal of US monetary policy was expected to be relatively limited, because after the 1997 Asian financial crisis East Asian countries had learned their lesson and were cautious about opening their capital accounts, and China had not adopted truly free capital flows either, so spillovers from changes in monetary policy would have little effect on the region.

On renminbi internationalisation, Lou Jiwei believed that internationalisation of the renminbi was undoubtedly the established direction; he noted that China was close to being the world’s largest trading nation and that its trade surplus that year was the largest in the world, but the share of trade settled in renminbi was too small. Renminbi internationalisation was first of all the internationalisation of settlement in trade, which required developing the offshore renminbi market, currently mainly in Hong Kong; Chinese banks should go abroad, set up subsidiaries and branches overseas, do more renminbi business, and first support the use of the renminbi under the current account. While preventing rapid cross-border flows of hot money, the use of the renminbi in investment should be expanded; at present, the funds foreign institutions invested in mainland China were almost all foreign currency, and they should gradually be allowed to invest with renminbi financing, whether raised overseas or from domestic institutions, before the capital account was gradually opened; this was the process of renminbi internationalisation. However, he was not optimistic about the opening of the renminbi capital account in the near term.