On January 15, financial news from the frontlines: The "18th Golden Kirin Forum • Financial New Departure," hosted by Sina Finance, was held today in Beijing. Mr. Yu Xuejun, former Chairman of the State-owned Key Financial Institutions Supervisory Board of the China Banking Regulatory Commission, attended and delivered a speech on the current domestic monetary environment.
Mr. Yu Xuejun stated that if the United States continues to cut interest rates this year, its economy will face significant financial risks; from a historical perspective, the current US interest rate level is not high and is appropriate. Why does the US always experience cyclical financial crises from a historical viewpoint? The most critical reason is that markets often generate bubbles. Why do bubbles always appear in markets? The most fundamental cause is monetary and credit expansion, meaning monetary policy is always managed too loosely.
Summarizing this history, what should a reasonable neutral interest rate be? It is generally believed to be around 5.5% or higher. This is a consensus within academia and enjoys a certain degree of recognition. Maintaining interest rates below the neutral level for too long releases excessive liquidity, which inevitably creates bubbles.
Currently, interest rates in the US and Europe are already below the neutral level; further reductions will, in the long run, certainly form bubbles and lead to adverse consequences. We can wait and see this point, and it is imminent; it will manifest within three years.
The following is the transcript of the speech: Yu Xuejun: Thank you, moderator. Distinguished guests, friends:
Good afternoon!
I am very happy to participate once again in the annual Golden Kirin Forum organized by Sina Finance. Centering on the forum's theme, I would like to discuss the monetary environment we currently face.
I began participating in this forum about ten years ago. Looking back, the earliest topics I discussed were about the economic situation and the monetary environment. I initially used the term "monetary environment" offhandedly; I didn't know if anyone had used it before or if it could accurately convey the concepts and content I intended. But later, I found that this term is actually widely and commonly used, indicating that it clearly expresses the intended meaning and is understood by everyone.
The speaking time at this year's forum is very short, so I will primarily focus on one viewpoint. The current interest rate level in the United States is actually already very low; further reductions will pose significant risks in the long term. My saying this differs greatly from, and is even diametrically opposed to, the mainstream view in financial markets, so you might be quite surprised to hear it.
First, starting with the Fed's rate cut just last December: after this cut, it was the sixth reduction since September 2024, with the federal funds rate now at 3.5%–3.75%. Everyone knows that both the US and European central banks are currently in a rate-cutting cycle and will certainly cut further this year. This requires a look back at history to understand what the reasonable neutral interest rate for the US should be. In the 1970s and 80s, the US experienced severe inflation and economic stagflation. The term "stagflation" in modern economics originated from this period. Later, the then-Fed Chairman, Paul Volcker, was regarded as a fighter against inflation in the US and globally; he acted like a lone hero, raising the federal funds rate to over 20% and stubbornly bringing down the US's double-digit inflation rate. His successor was the later famous Alan Greenspan. When he took office in 1987, the Fed's interest rate was around 9%. After taking office, Greenspan initiated a significant rate-cutting process, lowering it to 3% by the fourth quarter of 1992 and maintaining it for 15 months. During this period, a massive amount of dollar liquidity was released, which later contributed to the so-called dot-com bubble that burst around 2000, originating from the loose policies of this phase. In his book "The Age of Turbulence," Greenspan wrote that the dot-com bubble began as early as 1993. In February 1994, the Fed raised rates to apply the brakes; this hiking cycle peaked at 6%, and the concept of a "soft landing" was first proposed that year. However, this was maintained only briefly before rates were cut again, reaching a low of 4.75%.
By recounting this history, I want to convey that every bubble formation and crisis outbreak is preceded by a process of continuous monetary and credit easing, expansion, and accumulation—this is a fundamental condition. During the 1990s, Fed rates fluctuated around 3%, 6%, 4.75%, 5%, and later peaked at 6.5% when the Asian Financial Crisis erupted. Compared to today, these might not seem low, but given the historical context of that time, they were mostly too low, or the low-rate period was maintained for too long. Of course, 6.5% was certainly not low at the end, but it was maintained for a very short time. Understanding this point is crucial as it forms the basis for comprehending the issues we face today.
After the dot-com bubble burst, the US economy fell into recession. Starting in early 2001, the Fed rapidly cut rates. This was compounded by the severe impact of the September 11 terrorist attacks, leading to even larger rate cuts. In less than two and a half years, from early 2001 to June 2003, the Fed cut rates rapidly from 6.5% to 1%, and maintained this level until June 2004. This nearly four-year period of low interest rates in the US fostered a massive bubble, setting the stage for the international financial crisis that began in 2007, or even serving as a primary root cause. After the subprime mortgage storm, a president of a capital management company named Fleckenstein wrote a book titled "Greenspan's Bubbles: The Age of Ignorance at the Federal Reserve." The book argued that Greenspan's mistake was cutting rates too aggressively and maintaining excessively low rates for too long. During his roughly 19-year tenure at the Fed, he presided over both a stock market bubble and a real estate bubble, each lasting about a decade. These critiques were not voiced only after the international financial crisis; he frequently wrote critical commentaries during Greenspan's tenure. In today's terms, it was like "calling him out." We lived through that period; it is a fact. After reviewing this history, we must understand: why do financial crises always occur cyclically? The key is that markets often generate bubbles. Why do bubbles appear? The fundamental reason is monetary and credit expansion—monetary policy is always managed too loosely. How can monetary credit be properly controlled? What exactly is the neutral interest rate? Summarizing this history, it is generally believed to be around 5.5% or higher. This is an academic consensus with a fair degree of recognition. Maintaining rates below the neutral level for too long releases excessive liquidity, inevitably creating bubbles.
Of course, the neutral rate is not immutable across different historical periods and even carries some uncertainty. However, overall, its changes are slow and trending downward. At least over the past 50 years, the trend has been such. Currently, it should be above 4%, or between 4.5% and 5%. Even using 4% as a benchmark, current US and European interest rates are already below the neutral level. Further cuts will, in the long term, certainly form bubbles and lead to adverse consequences. We can wait and see this point; it is imminent and will manifest within three years.
Returning to the present reality: in this US rate-cutting cycle, Fed Chair Powell, based on his professionalism and duties, has been relatively conservative. After the December FOMC meeting, he clearly stated that he expects the Fed to cut rates only once more this year. However, Trump has demanded significant rate cuts. Powell's term ends in May, and Trump's prerequisite for selecting a new chair is alignment with his view favoring substantial rate cuts. This is a major variable the Fed faces this year. Consequently, predictions for the number of future rate cuts are now clearly divergent. But whether it's one cut, three cuts, or more, the broad pattern is set: the US benchmark rate is already significantly below the neutral level. The harm in this situation is that, in the short term, it might hinder achieving inflation control targets, and in the long term, it will inevitably accumulate a massive bubble, creating new risks.
Finally, on a related topic: there is considerable debate currently about whether AI has a bubble or will develop one, with opinions divided. Scientists represented by figures like Jensen Huang argue that AI has no bubble at all; AI is a major technological innovation, genuine infrastructure, tangible, reliable, full of future promise, and limitless potential. But what I want to say is that a bubble is never about technology itself, or any other industry or material issue; it is a monetary phenomenon. It's not that genuine technological innovation cannot lead to a bubble; these are two different things, separate concepts. Against the backdrop of this international monetary environment, what changes might occur domestically in China?
I have two relatively specific views: 1. The Renminbi will face renewed appreciation pressure. In fact, this began as early as May last year. The USD/CNY rate moved from around 7.35 to breaking through the 7.0 level by year-end, referring to both offshore and onshore prices. This was the first time it broke 7 since May 2023, primarily driven by US dollar depreciation. The US Dollar Index fell from 108 at the start of the year to 98 by year-end. The latest USD/CNY rate is around 6.97. I believe that this year, with the US cutting rates further or maintaining low rates, the dollar will generally weaken. Meanwhile, China, benefiting from its full industrial and supply chain advantages and the continuous optimization of its export structure in recent years, is expected to see stable growth in foreign trade imports and exports, building on last year's solid performance. For the full year, the Renminbi will face certain appreciation pressure. 2. Under Renminbi appreciation pressure, it is beneficial for foreign trade exports. Note: the premise is 'under appreciation pressure.' Large trade surpluses help improve domestic liquidity. Coupled with the continuous strengthening and implementation of China's macroeconomic policies in recent years, both存量 (stock) and增量 (incremental) effects will eventually create a叠加效应 (superimposed effect). The downward pressure on China's economic growth this year is expected to be further alleviated.
Due to time constraints, I'll conclude my remarks here. Thank you all!
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