The biggest tests facing China’s next central bank governor

With Zhou Xiaochuan likely to retire from the People’s Bank of China, taming debt levels is just one of the pressing issues the new chief will have to deal with

By Yinan Zhao  /  Bloomberg

Thu, Nov 30, 2017 - Page 9

When Zhou Xiaochuan (周小川) finally hands over the baton at the People’s Bank of China (PBOC) after a decade and a half in charge, his successor will inherit a series of headaches crowned by a debt pile racing toward 300 percent of output.

The next governor will be tasked with not just reining in that leverage without tripping up economic growth, but keeping an eye on accelerating inflation too, all as the institution’s role in a complex regulatory structure evolves.

As if that were not enough, they will also be tasked with maintaining a stable currency as it opens up to market forces and boosting communication to keep global investors in the loop.

“The PBOC is in more of bind than ever with its monetary policy,” Nomura Holdings Inc Hong Kong-based chief China economist Zhao Yang (趙揚) said.

“While it was fine to just look at inflation and economic growth targets in the past, the central bank now has to strike a balance among more targets — some of them conflicting,” he said.

China’s appointment of a new PBOC governor might be imminent, after Zhou last month signaled his retirement. Zhou is already helping set the agenda for his successor, having warned last month about the risk of a collapse in asset prices after the popping of a credit bubble.

If the US$40 trillion financial sector is a ticking time bomb, then the PBOC governor will be among those sweating over which wire to cut. Reducing risky interbank lending, weeding out dangerous behavior by asset managers and corralling Internet credit will all be key tasks, all while trying to prevent funding to the real economy from cratering.

While it has done a decent job so far with that balancing act, the central bank must now also find its place in a new regulatory structure for the bodies in charge of oversight. Whether the PBOC is the leading light of this effort or one among many might depend on the profile of the new governor. The clock is ticking: The financial sector faces further shakeups now that authorities have lifted some curbs on foreign ownership.

How the PBOC interacts with markets in pursuit of its nominal policy goals — maintaining stability in the value of the currency and thereby promoting economic growth — is undergoing a shift. From the credit quotas of the planned economy era that focused on the quantity of money in the system, the central bank is ultimately headed toward letting short-term interest rates set the price of money, as its global peers have long done.

Under Zhou, the PBOC has developed a bewildering array of instruments to guide market rates — but now it is trying to focus attention on just two at a time when it is actually increasing the range of maturities it uses.

Streamlining the policy framework will be a key task for the new governor, especially as the central bank has already announced that it is moving to a two-pillar system that pairs rates policy with tools geared to regulate prices of financial assets.

Of the world’s major central banks, the PBOC talks the least. Whereas US Federal Reserve and European Central Bank officials give hundreds of policy speeches every year, Zhou does just a handful.

However, there are signs that the central bank wants to better explain itself to markets, and has slowly increased commentary this year. In an ever-more complex market environment, Zhou’s successor might have to engage in open-mouth operations a little more.

Managing China’s massive capital inflows and outflows, and their effect on the yuan, complicates PBOC efforts to regulate the amount and price of liquidity in the market. It is a task it might ultimately be glad to be rid of, but for now heading toward a freer-floating yuan is something that the next governor is likely to continue.

Moving in that direction might aid another big goal for Beijing: boosting global use of the yuan. Despite the IMF conferring a reserve currency status last year, the yuan’s share of global payments is down from a 2.79 percent peak in August 2015.

With hefty financial sector and currency tasks already on its plate, it would be easy for the PBOC to forget about its inflation mandate a little. With a damaging episode of runaway inflation in the 1990s in mind, though, Zhou’s successor should keep a close eye on developments.

Consumer prices adjusted for food and fuel last month held at their fastest since 2011, evidence that surging factory prices are beginning to feed through. The government’s drive to reduce pollution could also spur inflation, making a tightening of policy not unthinkable.

While the PBOC has to take instruction from the Chinese State Council for major policies, the governor can always leverage his knowledge and experience to guide the direction of the policy debate, said Ding Shuang (丁爽), chief economist for greater China and North Asia at Standard Chartered Bank in Hong Kong.

“It is an important ability to make good arguments for its policies to top leaders, which helps the PBOC find a louder voice among policymakers, even though it might not enjoy full independence,” he said.