Monthly Archives: March 2011

Central Bank Transparency: Tell ‘Em More; Keep ‘Em Guessing

U.S. Federal Reserve chairman Ben Bernanke’s decision to hold press conferences after every other Fed’s interest-setting committee meetings set us thinking about central bank transparency in general and that of the People’s Bank of China (PBOC) in particular. How much is needed for effective policy making and what impact does being more open have on which aspects of it?

Beyond doubt central banks have become more transparent over the past two decades. Publics expect more accountability from government institutions that are, for good reason, insulated from standard political oversight. Central bankers have found that being more open makes their exercise of monetary policy easier. Markets become less skittish the more they know, an assertion backed by a growing body of academic research. Communication improves the predictability of monetary policy, thereby lessening financial market volatility and contributing to a more stable economy. In particular, greater transparency improves central banks’ ability to manage inflation expectations and thus makes inflation less volatile, if not necessarily less persistent.

That benefit of transparency alone should pique the interest of the People’s Bank of China. It is less open, we would hazard, than its counterparts in the other large economies. Government has long preferred more secrecy in monetary policy to less, which leaves it with more flexibility to guide the economy. In the mid-2000s, two economists, Nergiz Dincer and Barry Eichengreen, devised a central bank transparency index covering 100 countries. New Zealand’s central bank was most open, rating a 13.5 on the index, the Bank of England was a 12, the European Central Bank was an 11.5 and the Fed a 9.5, the same as the Bank of Japan. The PBOC came in at 4.5.

That score was a huge improvement on the 1 it had rated at the start of the decade. However, an update in 2009 by Dincer and Eichengreen to their work did little to suggest much change in the absolute rankings or the broad findings that central banks in developed economies that were politically stable tended to be most transparent, and that having a flexible exchange rate was a driver for greater transparency for reasons of public accountability.

The PBOC publishes an every wider range of data and reports on its web site as befits the increasingly central role it has taken in the macro management of the economy in the 2000s, but recent research by German economist Rolf Knütter and colleagues finds that statements and press conferences are more effective than long written reports in communicating a central bank’s intentions to financial markets. Hence the bookish and, for a central banker, limelight loving Bernanke’s decision. Press conferences tend to pull out the whys of policymaking, to augment the published whats. The PBOC is reckoned to be better at revealing the whats than the whys; its economic transparency is greater than its policy transparency which in turn is greater than its procedural transparency.

The PBOC has alternative channels of internal guidance to domestic financial institutions and markets. As those internationalize and liberalize, those channels will be increasingly inadequate channels of communication. One example that has has market participants complaining about the PBOC’s transparency weaknesses is the current round of monetary tightening. The first rise in the current series of interest rate increases last October caught money markets off-guard, as did many of the subsequent rate rises and increases in banks’ reserve ratios. Volatility in money market rates has increased in the face of market uncertainty about the central bank’s tightening intentions. The surprise rate rise announced just ahead of New Year, a time when cash is in high demand, caused the benchmark money market rates to spike by a record amount (242 basis point in one day). This forced the PBOC to inject cash into the money markets, negating its attempts to dampen inflation by mopping up liquidity though raising reserve requirements.

Similarly, as the exchange rate for the yuan becomes more flexible, that will enhance the independence of monetary policy and thus the importance of transparency to increase policy credibility and the central bank’s management of inflation expectations. The transparency of the PBOC could prove an informal indicator of the progress of market-oriented reforms in monetary policy.

Not all economists believe that greater transparency is an unalloyed public good. If it reveals divisions among policy makers or a low degree of confidence in the basis of monetary policy decisions, that can rattle markets. Central banks have more information about an economy than most investors. If investors doubt the robustness of the data or the analysis on which those decisions are being made, it can alter inflation expectations. That could have a direct impact on long-term interest rates, which in turn could determine the path of current and future consumption and investment.

In the event of a speculative attack on a currency, transparency can become an even more dangerous double-edged sword. Wharton finance professor Itay Goldstein and colleagues found that if all speculators in financial markets perfectly understand a central bank’s future course of action, the central bank may not get back market signals as good as it needs in making policy decisions. That risks policy mistakes. What central bankers then need to do, Goldstein suggests, is to surround their signals with some noise, so there are conflicting interpretations of what a central bank’s intentions truly are. That bit of greater transparency, at least, Beijing’s policymakers appear to have perfected.

Overall, the benefits of more transparency to central banks are greater than the risks. The Fed’s Bernanke is playing catch-up to his European counterparts. The PBOC has even more ground to make up.


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China Cracks Down On Imported Power Kerosene Tax Dodge

One consequence of high oil prices has been a resurgence of the smuggling of oil products such as gasoline, diesel oil and kerosene. 21st Century Business Herald (via Caijing) reports that staff from the Beijing operations of two Swiss-based commodity traders, Kolmar and Glencore, have been investigated in connection with what is said to be China’s largest oil smuggling case in a decade. Li Buhua, a Chinese national in Glencore’s Beijing-based trading team, has been detained by local customs officials, while Dou Shenyuan, manager of Kolmar’s operations in China was also detained. Both men have been released on bail.

Nearly 1 billion yuan ($150 million) of taxes are said to have been evaded in the course of the alleged smuggling of 800,000 tonnes of imported refined oil products, mostly power kerosene, between August and December last year. Power kerosene can be mixed with gas oil to produce a fuel for rural vehicles and generators as an alternative to diesel which is in short supply. The cargoes in question are said to have been imported from Singapore as being for chemical use, a category exempt from fuel consumption tax. Imports of power kerosene surged last year. Reports say the investigation was prompted by complaints from Sinopec, China’s largest oil refiner, following an unusual surge in imports.

One cargo has been acknowledged by Glencore which says it sold 120,000 tons of mixed kerosene and power kerosene to Guangdong Zhenrong Energy ‘free-on-board’ at Singapore, which means its responsibilities ended there. Guangdong Zhenrong Energy took the cargo away in four ships over a period of about two months, Glencore says, adding it doesn’t know why its employee was detained.

Chinese customs officials in Zhuhai, where the cargoes were landed, are said to be involved–at very least they would have had to turn a blind eye to the documentation and any test sampling of the cargoes–so further detentions are likely given the current crackdown on corruption. Nor would we be surprised to hear of more trading companies being connected to this illicit trade, which we are told is also flourishing in Vietnam and the Philippines.


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Hundreds Of Quakes Continue To Jolt Asia

Two 7.0 magnitude earthquakes struck northeastern Myanmar within a minute of each other today (the red box on the map above), not too far from the area in southwestern China hit by a 5.8 magnitude quake on March 10 which has left at least 26 dead in Yunnan. There are no reports yet of casualties or damage from the latest quakes, which occurred in a sparsely populated and remote part of Myanmar (see update below).

Meanwhile, aftershocks continue in Japan in the wake of the devastating 9.0 Sendai quake. The map above, which is from the United States Geological Survey, shows quite how seismically active Asia is right now. It plots all earthquakes of greater than 2.5 magnitude in the past week. There have been 236 of them.

Update: Xinhua says that more than 6,500 people in parts of Yunnan bordering Myanmar have been affected by the quakes in Myanmar, though there are no reports of serious injury. As of midday Friday, the quakes had left a reported 74 dead and at least 111 injured in Myanmar itself.

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China’s Rail Embezzlement Lite

The surprise about the finding of state auditors that 187 million yuan ($28.5 million) had been embezzled by individuals and construction companies working on the Beijing-Shanghai high-speed rail line is that the sum is so small. The estimated cost of the upgrade to the 1,318 line, the showpiece of the country’s corruption-plagued high-speed network, is now 217.6 billion yuan (up from the original estimate 160 billion yuan, incidentally). The fake accounting that the auditors have turned up amounts to less than a rounding error. Really?


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China Cracks On With Nuclear Power Plant Construction

The pause for breath in China’s ambitious nuclear development program announced following the crisis at Japan’s Fukushima Daiichi plants appears to have been no more than a single intake of air. Barely a week after Beijing suspended approvals of all new nuclear power projects until a safety review is carried out, Bloomberg reports that work will start next month on a planned fourth-generation nuclear power plant at Rongcheng in Shandong.

Cui Shaozhang, deputy general manager at Huaneng Nuclear Power Development Co., a subsidiary of state-owned China Huaneng Group, China’s largest power group, said it would be the world’s first high-temperature, gas-cooled reactor.  The Rongcheng plant will use helium in its cooling system, and its reactor cores are said to be able to withstand temperatures exceeding 1,600℃ for several hundred hours without melting down. “Japan’s Fukushima plant was using old technology while Chinese reactors are more advanced,” Cai is quoted as saying–words, this Bystander hopes, that will never come back to haunt him.



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Another Call For Reform Of China’s Local Government Finances

Another voice is added to those saying that reform of local government finances is the keystone to the “great rebalancing” of China’s economy. Sri Mulyani Indrawati (left), a World Bank managing director and former finance minister of Indonesia, told the China Development Forum in Beijing at the weekend that:

Reform of the overall system of fiscal intergovernmental relations is probably the most important element of the [reform] agenda. Expenditure responsibilities in China’s decentralized fiscal system generally do not match revenue capabilities well. Adequate local funding in poor regions would remove serous constraints on the delivery of social protection, education, health and rural services. In the absence of increased and reformed net transfers from rich to poor regions or other new revenue sources, large disparities between regions in spending per person on public services will unavoidably persist.

Stepping beyond diplomatic wordiness, Indrawati pointed directly to the problem of off-budget financing by local governments that so worries policymakers in Beijing because of the potential debt bomb that lies beneath:

Much of China’s public infrastructure is currently financed off budget by separate local government platforms. Shifting infrastructure finance on budget an make urban development and infrastructure expenditures more transparent and better integrated in the overall public finances.

Indrawati is positively blunt in her other recommendations that China needs to implement in order to achieve the goal of transforming growth from being export- to domestic consumption-led. Beyond reform of local government financing, she wants to see:

  • improved access to finance for private sector, service oriented, and smaller firms and in rural areas;
  • removed subsidization of inputs into industry such as land, capital, energy, and other resources, and exchange rate appreciation; and
  • further increases in dividend payments by state-owned enterprises, to improve the allocation of capital. In addition, there is significant room to remove restrictions on service sector development and open up more service sectors to the private sector.

Many of these start to touch on deep-rooted vested interests. Yet, as Indrawati says, if the gains of the past three decades of economic development are to be sustained, reforms to China’s institutions and policy making processes will have to be made.

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Sinopec Chairman Su Shulin Said To Be Next Fujian Governor

The Financial Times reports that authoritative sources in Beijing are telling it that Su Shulin (left), chairman of state oil giant Sinopec, is to become governor of Fujian province, a plum post Xi Jinping, the assumed successor to President Hu Jintao, held in 2001-02.

Su, 49, has long been tagged as a potential political leader. A spell at the top of one of the big state-owned enterprises is regarded as a rite of passage for such rising-star technocrats. Su comes from a farming family in northern China and qualified as a petroleum engineer, making his career at CNPC before being drafted in as chairman of Sinopec in 2007. He has been an alternate member of the Party’s Central Committee since 2002 and was a member of the Party committee in CNPC from 1997 until leaving for Sinopec, where he was Party secretary as well as chairman of the company. He has also been a member of the Party’s standing committee in Liaoning province, all of which underlines the close connection between state-owned industries and the Party.

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