“Give me tools and I will do the job” could have been the maxim of People’s Bank of China governor Zhou Xiaochuan when he took over the job in December 2002. Given that governors of China’s central bank do not enjoy the same powers as their counterparts elsewhere, analysts say Zhou’s achievement is all the more impressive.
Zhou is one of the longer-serving central bank governors in China’s recent history and, many attest, one of the ablest. Under his leadership, the PBoC has helped prevent China’s breakneck economic growth from translating into runaway inflation.
“Monetary policy, especially in the past two years, has been absorbing a huge amount of liquidity in the system,” Zhou told Emerging Markets in an interview earlier this year. The central bank’s actions over this period underlined “a tremendous role for maintaining the stability of the money supply in the economy”, he said, adding that without the People’s Bank’s efforts over this period, “inflation would have come much earlier and much stronger”.
“Zhou has a difficult job to do,” says Nicholas Kwan, regional head of Asian research for Standard Chartered banking group in Hong Kong. “He does not have full autonomy and the full range of powers that most central bankers have – most specifically the power to set interest rates.”
In Zhou’s case this limitation has been the need to use the benchmark one-year interest rate as part of the central bank’s policy mix. Any decision on setting interest rates has to come from China’s State Council – either the premier or the vice premier in charge of finance and economics.
Moreover, differences are emerging between China’s government agencies over monetary policy as an export slowdown and a global credit crisis threaten to undermine the world’s fastest-growing major economy. In addition to economic practitioner, Zhou has needed to be a diplomat too.
But in the past year, a rapidly changing global economic environment has constrained policy choices further. “When you design the policies, even though you try to reduce [economic] imbalances – balance-of-payment imbalances, reduce the trade surplus, increase domestic demand – you do so with certain assumptions,” Zhou said. “But later on when you find that these assumptions are not as you thought, or that they are different from the reality – this has quite an effect. It’s the dynamic process of decision-making which reflects the changing reality.”
Exchange rate policy is another contentious arena in which Zhou has helped China chart a pragmatic course: gradually appreciating the yuan while curbing expectations of a significant revaluation of the currency – a prospect which looks increasingly less likely in the wake of slowing growth.
The central bank too has shifted its gears: it cut borrowing costs for the first time in six years on September 15 and lowered the amount of reserves that smaller banks must set aside. And analysts expect PBoC to continue a rate-cutting campaign, after raising rates six times in 2007.
According to local media reports, the domestic political debate over how far the central bank should go to spur growth is beginning to boil over, amid rising speculation that Zhou may shortly leave his post. Yet whatever the outcome, Zhou will have left his mark on Chinese policy-making for years to come.