China central bank strives for more policy influence

Not a central bank in the conventional Western mold, the People's Bank of China has nevertheless emerged as a powerful player in steering the world's second-largest economy as the decade-long term of its governor, Zhou Xiaochuan, draws to a close.

On the world stage, Zhou is beating the drum for the dollar to be dethroned as the world's dominant currency. At home, the Chinese central bank chief isn't sitting idle either.

The central bank was pivotal in forging a consensus within the Communist Party leadership that led to the landmark revaluation of the yuan in 2005; similarly, analysts say the central bank was the driving force behind Beijing's decision last June to end a two-year peg to the dollar introduced to help China weather the global financial crisis.

The central bank has modernized China's domestic bond and money markets, introducing a flurry of short-term instruments to help it control money supply and guide market expectations.

The bank, which constantly has to fend off attempts by other state agencies to encroach on its turf, has also taken steps to keep a tighter grip on bank lending. Traders and investors around the world now hang on its every word and deed, even though, ironically, Zhou can only dream of the powers enjoyed by his foreign counterparts such as Ben Bernanke and Jean-Claude Trichet.

"The People's Bank of China is playing a more and more important role in the economy, although it's a fact that it still enjoys little operational independence," said Qing Wang, China economist at Morgan Stanley in Hong Kong.

Unlike Western central banks, the PBOC does not have the final word on adjusting interest rates or the value of the yuan. The basic course of monetary and currency policy is set by the State Council, China's cabinet, or by the Communist Party's ruling Politburo.

Zhou made headlines in March 2009 by proposing to replace the dollar eventually as the world's main reserve currency with a beefed-up version of the Special Drawing Right (SDR), the International Monetary Fund's unit of account. The idea may be premature, but Zhou is spearheading a programme to boost the use of the yuan in trade and investment to ensure the currency becomes a major component of the SDR.

The quest for policy clout has sparked some turf battles.

The PBOC was recently at odds with the National Development and Reform Commission, the powerful planning agency, on targets for bank lending and inflation.

On the currency front, the central bank has been wrangling with Commerce Ministry, a staunch defender of Chinese exporters, over the pace of yuan appreciation. Zhou wants a stronger yuan to help curb inflation; exporters, not surprisingly, are opposed.

The PBOC has only a short history as a true central bank. Until 1983, it was also engaged in deposit-taking. The enactment of the Law of the People's Bank of China in 1995 formalized its central banking powers. It was also responsible for financial supervision until the China Banking Regulatory Commission was set up in 2003.

Foreign central bankers speak highly of the PBOC's technocrats. "Compared with other major central banks, the People's Bank of China is less independent, but it's increased professionalism means more of its proposals will be endorsed by the leadership," said an analyst at a state-owned bank who declined to be named.

Zhou, a well-trained economist and keen tennis player, has promoted a number of influential Chinese scholars to senior positions to beef up the central bank's management.

Among them, deputy governor Yi Gang, who has a PhD in economics from the University of Illinois, is tasked with managing the country's $2.85 trillion foreign exchange reserves.

Yi and China Construction Bank Chairman Guo Shuqing are among the candidates to succeed Zhou, 63, who is due to retire next year.

[Source: Reuters, 24Mar11]

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