Download People`s Bank of China Rise to Top: Deft Politics Amid

PBOC’s Rise to Top a Story of Deft
Politics Amid Turmoil
Mar 7, 2013 11:22 AM EST
By Stephen Bell & Hui Feng
Youtube: https://www.youtube.com/watch?v=U9S6kdkY1yY
As of November 2012, the People’s Bank of China had total assets of $4.8 trillion, more than the European
Central Bank or the Federal Reserve. The PBOC now supplies more than half the world’s total liquidity
and manages foreign reserves worth almost $3.3 trillion.
Increasingly, the PBOC has become an international lender of last resort, particularly as European
politicians try to persuade the Chinese to buy their bonds. No wonder that Zhou Xiaochuan, the bank’s
governor, has been dubbed “the world’s central banker,” a man whose statements can move global markets.
It’s hard to believe that just three decades ago the PBOC was only a minor institution in the labyrinthine
Chinese bureaucracy. Its ascension is a story of turbulent economic transition, skillful leadership and,
above all, deft political strategy. And its most significant challenges may still lie ahead.
After the communist revolution, the PBOC was formally founded in 1949 as a national bank, authorized as
the center of cash, clearing and credit to serve the Chinese economy.
In the 1950s, the PBOC became the only major bank in China, a universal system that performed
rudimentary central-baking and retail functions. But it was marginalized by the financial repression and
bureaucratic hierarchies of China’s command economy. From 1958 to 1962, the PBOC’s branches were
merged with local government treasuries, and from 1968 to 1977 its head office of only 80 staff members
operated as a minor department within the finance ministry. The bank was nothing but a bookkeeper,
cashier and mint-master.
Deng’s Reforms
After Deng Xiaoping initiated a period of economic reforms starting in 1978, the PBOC gradually became
China’s most important macroeconomic management agency. The emerging market and a rapid expansion
of international exchanges demanded sophisticated financial intermediation that the PBOC’s universal
system was unable to provide.
The PBOC gained independence from the finance ministry in 1979, and as a series of state banks were
resurrected to engage in commercial business its role in the new system became a hotly debated question.
After lengthy internal arguments, its status as China’s central bank was officially confirmed in 1983 and its
commercial-banking businesses were given to the other state banks.
Inflation crises in the 1980s and early 1990s led reform-minded elites to push the PBOC to maintain price
stability via the Central Bank Law of 1995. The law said that “The aim of monetary policies is to maintain
the stability of the value of the currency and thereby promote economic growth.”
The central government also restructured the bank’s regional branches, giving them increased autonomy
from provincial governments, which had traditionally been a source of investment-driven inflation. After
central financial planning was phased out in 1998, the bank sought to modernize its monetary-policy
apparatus and developed closer ties with the international community.
More important, PBOC leaders forged political ties with reformist party leaders, particularly Zhu Rongji,
who had been the governor of the PBOC from 1993 to 1995 and went on to become premier in 1998. Zhu
lacked broad support in the central government, but the PBOC provided policy and bureaucratic backing on
a range of issues.
The PBOC thus won increased authority by becoming an indispensable ally for the reformist political
leadership. Under Zhu’s leadership, the bank had engineered a soft landing in 1996 after a bout of high
inflation (peaking at 24 percent in 1993), and won major arguments following the Asian financial crisis,
especially in pursuing a strategy of non-devaluation.
Flexing Muscles
With its new authority, the PBOC began to flex its muscles in the 2000s, particularly under the
governorship of Zhou Xiaochuan, an economist with intimate ties to the political leadership. Although the
party still exerts control over the financial sector, the bank has been exploring new, more market-oriented
instruments and mechanisms within its discretion to establish a credible monetary policy and maintain price
stability.
From 1979 to 1994, economic growth averaged 10.1 percent while inflation averaged 7.7 percent. From
1995 to 2011, economic growth averaged 9.9 percent while core inflation fell to an average of only 3.1
percent. This track record gave the PBOC greater authority and room for maneuver in macroeconomic
management.
The PBOC also played a central role in liberalizing China’s exchange rate in 2005 and again in 2010,
despite mounting internal resistance. Recognizing the importance of a sound banking sector for carrying
out monetary policy, the central bank also took the lead in recent banking reforms aimed at improving
corporate governance and market discipline. Under Zhou, the bank has also been active in reforming the
securities, insurance, and bond markets, internationalizing the renminbi, and establishing state-of-the-art
payment and settlement systems.
But the PBOC still faces plenty of challenges. In the short--to-medium-term, it will have to address bad
loan risks, especially an increasing prevalence of shadow banking and banks’ exposure to real estate and
local-government debt. In the longer term, it will have to ensure stability as China transforms into a more
domestically driven economy. What makes these tasks more daunting for the PBOC is that it must
constantly bargain and negotiate with other bureaucracies and with the party leadership. It also must
implement a more market-oriented monetary policy while constrained by the legacies of the communist
past, such as state control of key financial sectors.
But the bank’s future depends on more than adroit political maneuvering. It must also stave off the kind of
financial catastrophes that have besieged the U.S. and Europe in recent years. And that may turn out to be
the most difficult challenge of all.
(Stephen Bell is a professor of political economy and Dr. Hui Feng is a research fellow in the School of
Political Science and International Studies at the University of Queensland. Their latest book is “The Rise
of the People’s Bank of China: The Politics of Institutional Change.” The opinions expressed are their
own.)
Review
Book notes: The Rise of the People’s
Bank of China: The Politics of
Institutional Change
Author: Robert Pringle
Source: Central Banking Journal | 17 Feb 2014
Categories: Governance
Topics: People's Bank of China, China, Chinese renminbi (RMB)
Stephen Bell and Hui Feng, The Rise of the People’s Bank of China: The Politics of Institutional
Change, Harvard, 2013, 376 pages
I first visited the People’s Bank of China (PBoC) in 1993, at a key stage in China’s reform process, which
was overseen at the time by Zhu Rongji as economic czar (he was later prime minister). In my report, ‘The
view from the People’s Bank of China’, Central Banking, Volume IV, No 3, 1993, I described the
sweeping reforms being implemented by the central bank against a background of record-beating economic
growth rates. The key test was whether the central bank could get a grip over its own provincial and lowerlevel units, which had autonomous credit-creation powers as a legacy of the old planning system. The risks
of fragmentation of monetary control had destroyed the money of several societies that were in transition to
a market system.
Until shortly before my visit, China’s central bank had been on the sidelines of economic policy-making,
which was dominated by the state planning agency and the ministry of finance. It had pursued the two
objectives of economic growth and currency stability; in future, it would only pursue one – currency
stability. Previously, the central bank had allocated credit according to the principles of the planning
system. There was strong political support for the reforms: China already had a 15-year track record of
world-beating growth and a huge rise in real incomes, which had made reformers confident. But the central
bank was still finding its feet. The main political opposition centred on demands for regional autonomy and
vested interests, including privileged access to foreign exchange.
Growing authority
Stephen Bell and Hui Feng analyse the astonishing growth in the authority of the central bank since that
time, nesting their story within a rigorous theoretical framework, meaning this book will appeal to both
scholars and market participants. They provide a detailed account of the formal and informal institutional
and political dynamics that formed the basis for the development of the central bank. They divide the
crucial reform periods into the first great reforms of 1978-92 and the second reform era that started in the
mid-1990s. Gradually, the plans on which I reported in 1993 became a reality, as the institution exploited
the discretion afforded to it by acquiring greater authority and a secure place within the structure of
governing institutions of one-party rule. The authors show how the institution has used its growing status to
exercise a decisive say in the setting of policy, for both interest rates and exchange rates, and the ongoing
reform of banking.
Their conclusions are finely balanced. On the one hand, it is wrong to portray the PBoC as a ‘puppet’ of the
Communist Party. Equally, it does not enjoy a high level of independence; it has a limited, but increasingly
well-defined role, and within that space has accumulated great authority.
Anybody studying China’s monetary history knows the horrors it has suffered from hyperinflation and
currency depreciation in the past 100 years, notably following WWII. After that, inflation was repressed by
the planning system. Banishing these inflationary devils has been a huge achievement, in which the dollar
peg from 1994 to 2005 played a major role. The authors trace how the rising authority of the PBoC was
shaped by fear of further inflationary crises. More recently, it has had to fight against consumer price index
(CPI) inflation and asset-price bubbles. The time when I first visited Beijing, in 1992-93, marked a crucial
transition to a more market-led monetary policy framework, but the authors believe the economy remains
inflation-prone.
There have been several major economic cycles since then: the soft landing in 1996, the Asian crisis of
1997-99 and deflation followed by the emergency stimulus of 2009. This was mandated by party leadership
and, the authors argue, represented a “setback” for disciplined monetary policy and for the PBoC.
The PBoC under Zhou Xiaochuan, governor for the past 10 years, has been the major force behind the
move to reform the exchange-rate regime despite political resistance, say Bell and Feng. China has
developed a managed currency basket-based system, and overseen a successful appreciation of the
renminbi. At the same time, the PBoC has developed a distinctive approach to reserve management, as well
as developing a payments infrastructure that has played a critical role underpinning rapid economic growth.
A work in progress
Owing to such a record, the PBoC has grown into a “policy heavyweight” and an “indispensable ally” of
the political leadership: “these political and institutional dynamics of mutual dependency, set within
facilitative change contexts, have been the key to explaining the puzzle of the rise of the PBoC’s authority”
(p299). The authors say the central bank enjoys considerable discretionary space in a number of policy
areas, including bank reform and foreign exchange sterilisation policies. Banks have been restructured as
shareholding companies. The central bank has fought both CPI inflation and asset-price booms.
The PBoC does not seek the approval of its Western counterparts, nor has it copied others. The consensus
in China has long been that the country needs to find its own way at its own pace. The PBoC is the world’s
largest central bank by assets and “the major supplier of global liquidity”. Its M2 money supply is said to
be 52% of the world total, and Zhou has been called “the world’s central banker” by Standard Chartered
Bank – a description dismissed as false flattery in China.
The rise of the PBoC remains a work in progress. The institution is still politically vulnerable to any
perception of policy weakness or failure. It faces major challenges. As in the West, the search for a strong
monetary anchor continues. In the authors’ view, greater exchange-rate flexibility and full interest-rate
liberalisation will become essential. Beyond that, ultimately, “the political deficiencies of authoritarian rule
will have to be addressed”.
Robert Pringle