A conversation with Timothy Adams on China

Chinese leaders are embarking on reforms that could remake the financial sector and liberalize the yuan. But will they unfold smoothly? Timothy Adams, president of the Institute for International Finance shares his thoughts with GlobalPost.</p>

Chinese leaders are embarking on reforms that could remake the financial sector and liberalize the yuan. But will they unfold smoothly? Timothy Adams, president of the Institute for International Finance shares his thoughts with GlobalPost.

Editor’s note: The author is the editor-in-chief of the business channel at China’s People’s Daily.

BEIJING, China — Now, all eyes are on China's new round of financial reforms as Beijing steps up its commitment to the much-anticipated reform with the establishment of a free trade zone in Shanghai and a slew of recently issued liberalization measures.

The financial reform, if successfully implemented, will further open up China's financial markets to the global business community and create more opportunities for international investors by gradually liberalizing interest rates, loosening capital controls, relaxing the convertibility of the yuan and state ownership of the banking system, as well as expanding capital markets, among others.

But how will this tempting blueprint actually come to fruition? Are there any challenges facing the eagerly awaited reform in the world's largest and most dynamic developing economy?

As the president and CEO of the Institute of International Finance (IIF), who regularly interacted with counterparts in key emerging markets including China and traveled extensively throughout the world's second-largest economy, Timothy Adams is especially qualified to comment on China's economic and financial issues.

Prior to joining the Washington-based IIF, the world's most influential global association of financial institutions representing more than 400 member agencies around the globe including most of the world's largest commercial banks and investment banks, Adams served as the undersecretary for international affairs at the US Treasury Department, where he was the George W. Bush administration's point person on international financial and economic issues, including exchange rate policy, G7 and G20 meetings, and IMF and World Bank issues.

The former Treasury undersecretary recently had an in-depth conversation in Beijing with Zhenyu Li, editor-in-chief of the business channel at the People's Daily Online and a contributing columnist for some of the world's leading trade publications.

Adams shed light on the financial reform in China, China's monetary policy and China-US exchange rate as well as voicing his interpretation of China's much-talked-about new catchphrase — the Chinese Dream.

Here are excerpts from their conversation, edited and condensed by GlobalPost.

Zhenyu Li: Tim, please tell the audience a little bit about your China-related background first.

Timothy Adams: Sure. My first trip to China was in September of 2001, and I was with Treasury Secretary Paul O'Neill at that time. Then I've been on countless trips here over the past 13 years. I was part of the effort with former US Treasury Secretary Henry Paulson to start the first US-China Strategic Economic Dialogue, which was an important part of advancing US-China economic relations.

Zhenyu Li: Great! Let's move on to the topic about the much-talked-about financial reform in China. As you know, it is almost a consensus among economists that economic reforms would be vital, or to say, the only way to put China on a more sustainable footing. And reforming China's financial sector is considered a top priority. So what's your take on China's financial reforms?

Timothy Adams: First of all, I do agree with that statement that China has witnessed and experienced remarkable economic growth for the past 30 plus years. But that growth model — which was so important in achieving China's great prosperity — needs to adapt and change so that the next 30 years can experience the same kind of economic progress.

Financial sector reform is a key ingredient in a new growth model. And that key ingredient is about better allocation of savings to new growth industries, allowing households and individuals a more diversified and safer portfolio of savings and also allowing households greater returns on their savings, which raise their incomes and allow them a higher standard of living.

So, for China to transition to a new growth model, which is happening and is a priority for the Chinese new leadership, for that to happen, financial sector reform has to be a part of the changes that will lead to a new growth model.

Zhenyu Li: As you know, a core component of the modern financial system is capital market. The capital market reform plays a major role in China's overall financial sector reform. China has so far still been an economy that relies heavily on indirect financing. So, how do you see the reforms in China's capital markets, and also the yuan convertibility?

Timothy Adams: I focused my comments today specifically about capital markets and the role vibrant capital markets generally, specifically the bond market, the role that it could play in channeling funding for infrastructure and for urbanization while also giving households and individuals new and diversified instruments to invest in, that are safer, again more diversified and offer greater returns.

I think it's very, very important to create new channels of funding in addition to the very important banking sector. China has a very vibrant and profitable banking sector, but it also needs a parallel to that, a capital market structure that allows for the funding of investment projects, the funding of infrastructure, the funding of urbanization, and also allows savers different kinds of assets to own and invest in, which are safer and less volatile and have higher returns.

Zhenyu Li: Talking about creating new channels of funding in addition to the regular banking sector, you know, the so-called shadow banking has grown quite rapidly over the past few years in China.

Curtailing shadow banking is necessary for ensuring the stability of China's financial system because of the risks it posed outside the constraints of bank regulations; however, in an economy that relies heavily on credit expansion, such tightening measures will also weaken China's economic growth.

So what's your take on China's thriving shadow banking sector?

Timothy Adams: Well, shadow banking has grown exponentially over the past 18 months to two years. Some of that is the fact that savers are looking for higher returns. And if we had that kind of financial sector reform that I think should occur, and China could liberalize interest rates, some of those savings that have gone into shadow banking will return back to the regular banking sector.

So I think it shows an indication that reform is needed, and the households are looking for greater returns and greater diversity of products to invest in.

Zhenyu Li: As one of the most respected senior finance executives from a country that boasts perhaps the most advanced financial system, what do you think are the experiences that China can borrow from the United States in regard to the financial reform?

Timothy Adams: I would encourage broad-based reform in the financial sector, and in sequence that coordinated in the right fashion.

Actually I think China already knows what to do. President Xi and Premier Li and China's top financial and economic leadership had already begun to articulate a vision for economic reform generally that I think is right on. It's spot on. It's exactly the right direction that China should be going.

The Chinese authorities are already doing the right thing. I would just encourage them to continue on this road to reform and where it went possible to accelerate that process so that China can make the transition to a new growth model.

Zhenyu Li: You mentioned that you would encourage China to accelerate the process of financial reform. But if China does it too hastily, it could have all sorts of unforeseen consequences from corporate bankruptcies to a massive downward repricing of financial assets, and could even potentially trigger a debt crisis the country has so far managed to avoid.

So, how do you see the pace of China's financial reforms? And what do you think are the risks for China if the nation opens its financial markets too quickly?

Timothy Adams: I think the key is to find the right pace. If China does it too quickly and if it's not sequenced correctly, then the country faces the potential for greater volatility and uncertainty. But if China does it too slowly, then it doesn't make the transition to a new growth model faster enough to compensate for the slowdown in the old growth model.

So, I think finding the right balance and speed is important, but so is sequencing the various reforms in the right way. And from what I've learned, Chinese economic officials understand this timing and sequencing issue, and are working to address it.

Zhenyu Li: You know, the yuan convertibility and exchange rate reform are also important parts of China's broad financial sector reforms. As of right now, the Chinese currency, the RMB, has appreciated about 34 percent against the US dollar since the exchange rate reform eight years ago. So, what is your take on the yuan's appreciation?

Timothy Adams: The appreciation and the officials' efforts to allow that appreciation I think should be applauded. It was the right policy; it's the right trend and the right outcome. And it's probably pretty close to being at its equilibrium level, maybe a little bit still undervalued, but it's pretty close to its equilibrium. That's important for Chinese households. It increases their purchasing power for imports in a variety of goods and services, makes that cheaper, and therefore raises the living standards for households.

But I think it's part of the reform effort with respect to liberalizing interest rate, opening the capital account, letting the exchange rate reflect underlying flows of demand and supply, all those are important part of overall financial sector reform.

Zhenyu Li: So you don't think the Chinese currency is still much overvalued, right?

Timothy Adams: I've seen a variety of estimates that say the yuan is undervalued by 7 or 8 percent, but those models can differ. I am more interested in focusing on the broader trend, and the trend has been the right direction, it's been the right policy, and we should applaud the Chinese officials for allowing that to happen, and encourage further liberalization of the exchange rate.

Zhenyu Li: What's your prediction on the yuan's exchange rate against the US dollar in the medium term?

Timothy Adams: Well, I would expect that the exchange rate will continue to normalize and whatever adjustments need to occur in order to reach equilibrium will actually occur, so I would say that I would be fairly bullish on the exchange rate of the currency in the medium term.

But again, this is part of a broader panoply of changes that will occur as part of the financial sector reform.

Zhenyu Li: Talking about the China-US economic ties, the relationships seem to be strengthened after the fifth round of the China-US Strategic and Economic Dialogue and President Xi Jinping and President Barack Obama's California meeting.

Timothy Adams: Yes. I think the relations are good. There is less complaining in the US about a misaligned exchange rate than there has been in previous years. There is always going to be some debates or discussions about trade issues, but that happens with every one of our trading partners in the US. There are always some complaints between the US and some countries on a particular trade case, and that's just the normal part of an open and global and complex trading system. But I've seen the US-China economic relations are good and getting better.

Zhenyu Li: You know, Chinese President Mr. Xi Jinping has put forth a new doctrine — the Chinese Dream, which has become a buzzword both in and out of China. So, what is your interpretation of the Chinese Dream?

Timothy Adams: Well first of all, I think it's great to talk about social aspirations. You know, in the US, we talk about the American Dream, and it varies from person to person and family to family. What the American Dream really talks about is social mobility, economic mobility and economic opportunity.

And I don't want to speak for China's president, but I think the idea is for China and China's population to have high aspirations. And China does and China should, because it's a great country and it has enormous opportunities.

But I think what President Xi says is to challenge people to have big dreams and to create the idea of economic mobility and economic progress. And I think those are good and really noble characters.

Zhenyu Li: How do you think the so-called Chinese Dream will affect the US and the global economy?

Timothy Adams: Well, I think it's complementary. You know, it's in the United States' interest to have a growing and prosperous and developing Chinese economy, an economy that is vibrant, and is growing more important and more integrated in the global economy. So I think it's complementary to the American Dream.

Zhenyu Li: Speaking of the American Dream, the concept became prominent during the 1960s after a decade of strong growth that is referred to as the golden age. The Chinese Dream also comes after a golden era of growth. So, would you care to make a comparison of the two dreams? The Chinese Dream and the American Dream?

Timothy Adams: First I guess I would argue that the American Dream has been a part of American history for centuries. You know, my ancestors in the early 18th century left Ireland — they were Scotch-Irish — and went to the United States in order to have a better life and make a life of their own.

So, I think throughout US history, the American Dream is about having the capacity and the opportunity to better oneself and not be stuck in social constraints and economic constraints.

So I think that's the idea that individual and family have the capacity to better themselves. And that's obviously easier to do in a period of rapid economic growth when everyone is doing well together.

Zhenyu Li: And finally, talking about your personal stories here, would you like to share some of your success stories?

Timothy Adams: Sure. My parents were not well-educated. Neither of my parents have more than ninth grade education. They were hard-working, blue-collar workers. I grew up in a rural area of Kentucky. My grandparents did not have running water; they did not have indoor plumbing. But I was able to go to college. I went to graduate school and I ended up moving to Washington becoming an adviser to the president of the United States and working in the White House.

So going from one generation where my grandparents had no indoor plumping to being able to work with the leader of the United States and be able to work in the While House as an adviser says a lot about what is great about the United States, the capacity to come from the very modest background and achieve great things.

Zhenyu Li: That speaks volumes for the American Dream and your individual achievements. And to wrap it up, would you care to share a little bit of your personal success formula?

Timothy Adams: Well, I had the opportunity to get an education and I did so and I saw the opportunity and I worked very hard for years. And I had some lucky breaks along the way.

I got help from my mentors, you know, they gave me great advice and wisdom. But I grew up in a time in the US where economy mobility was very important and education would open a lot of doors.