Tag Archives: People’s Bank of China

China Readies A New Era In Financial Policymaking

Headquarters of the People's Bank of China, Beijing 2015. Photo Credit: bfishadow. Licenced under Creative Commons.

THE GOVERNANCE REORGANISATION rubber-stamped by the recently concluded National People’s Congress has significantly changed the policy-making and regulatory landscape of the financial system.

As with other parts of the administration, it has consolidated agencies and strengthened the Party’s leading role over state administration.

The People’s Bank of China (PBOC) has emerged as the institutional lynchpin of the system with the banking and insurance industry regulators merged into the new China Banking and Insurance Regulatory Commission (CBIRC) and now reporting to the PBOC.

The central bank will be headed by Yi Gang, previously deputy to Zhou Xiaochuan, now 70 and who is retiring after 15 internationally respected years as governor. Yi nominally reports to the Standing Committee of the NPC but in effect to Liu He, long President Xi Jinping’s closest economic advisor and now elevated to vice-premier in charge of economic policy.

This all leaves China’s prime minister, nominally the country’s second-ranking official and customarily the one responsible for running the economy, pretty much out of the picture. That has been the de facto case for some time as Liu has been steering financial and economic policymaking from the leading group on the economy.

As vice premier, his remit will run to the financial sector, state-owned enterprise reform, industrial policy and relations with the United States. The remit underlines the twin challenges that China faces from a level of debt approaching 300% of GDP and in dealing with a United States that seems ready to start a trade war if that is what it thinks will let it get the upper hand in what the Trump administration sees as the United States existential struggle with China.

Liu’s academic credentials and worldliness are immaculate for a policymaker. However, his bureaucratic experience does not match. Yi’s promotion at the PBOC signals not only policy continuity at the central bank as it tackles deleveraging but the need for operational expertise, which Yi, a 21-year veteran of the central bank, brings.

Similarly, the appointment of Guo Shuqing as the Party boss in the central bank, and thus Yi’s senior in its political hierarchy, adds another experienced and tough-minded financial regulator to the mix — not to mention another ally of Xi’s.

Guo also heads the new CBIRC, previously having been chairman of the China Banking Regulatory Commission where he led the crackdown on shadow financing and helped clean up the interbank lending market. He has also been prominent in taming the more ambitious overseas acquisition ambitions of some Chinese companies and has experience as a stock market and foreign exchange regulator.

How the duopoly at the head of the PBOC will work in practice is illustrated by the fact that Guo also becomes deputy governor, with the ‘reform’ mandate, while Yi has been appointed deputy Party chief.

Zhou combined both the Party boss and governor’s role (although the foreign ministry has a similar split arrangement.)

China has no truck with Western notions of central bank independence as given to the US Federal Reserve, the Bank of England or the European Central Bank. The PBOC is subordinate to the government, which in the Xi era means evermore to the Party as he strengthens the Party’s leading role.

In that light, it will be Liu who will be setting the direction of, and Yi who will be running China’s financial and monetary policy with Guo ensuring regulatory and supervisory coordination on the one hand and political coordination on the other.

All three men are long-standing advocates of financial liberalisation. However, there are urgent short-term issues to resolve, notably the United States and debt, that will slow progress toward liberalisation. Cautious opening up of access to the financial system to foreign investors and more internationalisation of the yuan will continue, albeit not at the cost in either case of deregulation elevating financial risk.

One of the reasons for the consolidation of the supervisory agencies is to cut out as much as possible the regulatory fragmentation that has allowed the shadow banking system to take root. Financial stability is the political priority right now. The marching orders from the trio’s now all-powerful boss are to clean up the debt and rebalance the economy without crashing it — or having the United States crash it for them.

Advertisements

Leave a comment

Filed under Banking, Economy

Markets Expose China’s Inherent Economic Contradiction

100 yuan notes

THE RECENT VOLATILITY in financial markets has brought into question the capacity and nerve of China’s policymakers when confronted with variables they cannot control politically. This heightens concern not so much about the gathering pace of the economic slowdown as about the country’s prospects for the next stage of the economy’s d development, ‘rebalancing’ away from export and capital investment-driven growth and towards domestic consumption.

In what was mostly a closed economy, policymakers had relatively few monetary and fiscal levers to pull, but they were effective when yanked. Administrative guidance was particularly efficient. As the financial system has been opened up, the less guidable animal spirits of market forces have come more destabilisingly into play. The new tools to control them have arrived piecemeal, an inevitable consequence of the deliberately measured pace of financial-sector liberalization.

The currency has been in the vanguard of the reforms in lockstep with freer capital flows, moving steadily along the path of full convertibility, whose final destination has allowed the yuan to achieve the accolade of inclusion in the International Monetary Fund’s basket of reserve currencies.

The People’s Bank of China has a deserved reputation in financial circles around the world for the high calibre of its officials. But even their competency has been questioned following their uneasy and unexpected guided devaluation of recent weeks and their attempts to bring the tightly managed onshore and market-driven offshore exchange rates into alignment, a move undertaken for SDR-related reasons as much as currency management, but done with a tin ear for timing.

The central bank’s switch to managing the yuan’s value against a basket of currencies was both poorly signaled and sent mixed signals to investors, who tend to focus on the exchange rate against the dollar.  If investors lose confidence in the central bank’s effectiveness in the execution of monetary policy, it will only feed the volatility of the equity markets, where officials have already revealed a far from sure touch in their attempts to stabilize the markets.

While it may be virgin territory for many of them, policymakers clearly miscalculated the linkage between tumbling equity prices and speculative pressure on the currency, and how quickly the currency would become the focal point of market unease about China’s economic prospects among investors. It also says something about how the world has changed that the competency of Chinese policymakers has supplanted U.S. monetary policy as the primary determinant of global investor sentiment.

It is the nature of financial markets to be volatile in greater or less degree. Policymakers will learn by experience the limits of their reach in such an environment. Three decades of history will have left them more naturally inclined to intervene than not, which will make that learning painful and slow — last summer’s lessons from the mishandling of the stock-market plunge were clearly not well learned this most recent time round.

However, the broader concern to this Bystander is that financial-market turbulence will encourage Beijing to backslide on further financial-sector reform and more broadly on rebalancing. For some months, it has been dialing back on talking up the need to reduce government intervention in the economy. The third Party plenum at which the top leadership pledged to give market competition a decisive role in the economy seems longer ago than the 30 months it was.

Similarly, the notions that powerful bureaucrats can be a panacea for all economic ills and that the state can trump the market are fading. With that will come doubts in the some senior minds that the Party can pull off the unprecedented trick of liberalizing China’s economy without doing the same to its political system, unacceptable to the Party though the later is.

The certainty that state control provides versus the benefits that free markets bring is the inherent contradiction that may have been manageable for the past 30 years of the economy’s modernization but which, as Japan and South Korea have shown on a smaller scale, becomes more not less contradictory as an economy advances and becomes too big and complex to answer to political imperatives — and to the bureaucrats imposing them.

Leave a comment

Filed under Economy, Markets, Uncategorized

Yuan Marches On Towards Reserve Currency Status

100 yuan notes

THE INTERNATIONAL MONETARY Fund’s staff have recommended that the fund includes the yuan in the basket of currencies that constitute its Special Drawing Rights. The IMF’s board is likely to endorse the staff’s view at its November 30 meeting, agreeing that the currency meets the test of being ‘freely available’, a test that it failed in 2010 when the IMF last reviewed its basket. The yuan would then become a reserve currency from September 2016.

The staff recommendation is not unexpected, but it marks another milestone in the Chinese currency’s internationalization — and more significantly its full convertibility. As we have noted before, the contingent opening of the capital account is an important policy priority for rebalancing the economy.

Recent changes to that end, but also to address specific IMF concerns, have included overhauling how the central bank sets its reference rate for the currency in foreign-exchange markets, letting foreign central banks trade China’s onshore currency products and improving the short-term yield curve through the issuance of  three-month debt.

The People’s Bank of China said in a statement that it welcomed the IMF staff’s recommendation, trotting out that making the yuan a reserve currency would be “a win-win result for China and the world” and avowing its commitment to financial reform and opening-up.

None of that makes pushing ahead with either any less urgent, or any easier.

1 Comment

Filed under Banking, Economy

China’s Currency Depreciation Is Not An Opening Salvo In A Currency War

RMB vs USD chart, 10 year time series

HAVING SIGNALED AS recently as late last month a widening of the yuan’s trading band, authorities have opted for a ‘one-off’ devaluation of the currency. The People’s Bank of China on Tuesday set its daily fix 1.9% lower than the previous day, its biggest daily shift since introducing the system, and taking the currency to a three-year low.

At the same time, the central bank said that future fixes would pay more heed to both the previous evening’s closing price and movements in the foreign-exchange markets. It will also seek to drive closer convergence between on- and offshore exchange rates.

This Bystander retains the view that these changes are primarily steps in the direction of eventual full convertibility of the yuan rather than a ‘currency-wars’-sparking devaluation to bolster exports and thus boost the slowing economy. Rebalancing the economy and securing IMF SDR status remain higher policy and propaganda priorities. Both require liberalised foreign-exchange markets.

As the chart above shows, the currency has been moving modestly lower against the dollar since the beginning of last year having seen a steady appreciation for the previous eight and a half years. However, as the chart also shows, the central bank has been holding a lid on that depreciation most recently, probably for fear of destabilising capital outflows.

In the short term, the central bank’s unexpected policy change will likely let the currency drift lower than it would otherwise have done. But the key point is that depreciation — and its reversal if and when it comes — will be driven more by market forces than administrative fiat.

Leave a comment

Filed under Economy

China’s Interest-Rate Liberalization Takes A Sideways Step

IS THE PAST prologue when it comes to China’s interest rates? For two years, the answer was no. Late last week, that answer changed with the central bank’s surprise cut in its benchmark one-year lending rate by 40 basis points (bps) to 5.6% and the matching deposit rate by 25 bps to 2.75%, its first cuts since July 2012. More to come is the question now.

An across-the-board measure is at odds with the targeted approach to managing the economy’s slowdown hitherto pursued by the People’s Bank of China. In September, it had injected 500 billion yuan ($81 billion) of liquidity into the five big banks to support credit and growth. Earlier in the year, it had cut reserve requirements for rural commercial banks and credit cooperatives.

Nonetheless, the central bank says that its rate move does not represent a change in monetary policy. In as much as the benchmark lending rate is largely symbolic, that may be true in a perverse way. The bank also lifted the maximum permitted deposit rate to 1.2 times the benchmark from 1.1 times. That is another incremental step in the direction of interest-rate liberalization. However, it will also largely negate the effect of the newly announced rate cut on the economy.

If anything the asymmetric cut will amplify the narrowing of the gap between lending and borrowing rates that has been going on for some time. That, we think, is more likely to cool the home-building market, as it will make home-buying loans even less profitable for banks than they are now, than to stimulate it.

If the economic mood music does not seem to presage further cuts, this Bystander suspects that factional infighting is underway, with the State Council leaning on the central bank to cut corporate borrowing costs. That mostly benefits the politically well connected large state-owned enterprises, who do not particularly need to borrow money, but will be happy enough to see their profit margins expanded through lower financing costs. As we have noted before, there are still vested interests providing considerable obstacles to the drive for economic reform.

The language of the central bank’s explanation of its rate move is telling. It is casting the cut in terms of financing costs, especially for small businesses, rather than a need to stimulate a slowing economy. However, if it is serious in what it says about guiding market rates lower, it would be best served by advancing the cause of interest-rate liberalization.

In its statement explaining the cut, it says:

Market-oriented interest rate reform is a systematic task, and calls for coordination with other reforms. Therefore we need to strengthen the coordination of various reform measures, unite those together as a force, and in the end finish building the mechanism and system to fully allow for the market’s decisive role in resource allocation and better allow the government to function.

The central bank has been a leading proponent of financial reform. Those measured words sound like it is on the back foot at the moment in the broader political debate.

Leave a comment

Filed under Banking, Economy

The Appearance and Reality of Resisting Stimulus In China

NEW MONTHLY ECONOMIC indicators confirm the slowing of China’s economy. Growth in retail sales, industrial production and fixed-asset investment all decelerated in October. Nonetheless, central bankers are likely to hold fast against calls for across-the-board stimulus.

A political and an economic reason underpins that view. The first is that old-school pumping of money into the economy that will only flow through to infrastructure investment runs counter to top leadership’s plans to redirect the economy away from investment- and export-led growth to domestic consumption. The People’s Bank of China is a champion of economic reform. It does not wish to be seen to be falling back to the old ways any more than it can help.

The second is that even if it cut interest rates or lowered the banks’ capital reserve requirements, the money freed up is unlikely to find its way to where it could do most good, privately owned small and medium sized businesses. Such businesses don’t have access to the corporate bond market and rely on banks for financing. However, banks have become wary lenders except to the largest and state-owned enterprises that don’t need the money.

The central bank has the room to ease should it choose to do so. Inflation remains subdued, and the economy grew in the third quarter at its slowest rate since the 2008 financial crisis. Against that, the unemployment rate, more closely watched than the GDP number in Beijing these days, is steady. And growth, though slowing, as expected, is not threatening a hard landing.

Targeted stimulus will continue, regardless. The National Development and Reform Commission, the top economic planning agency, has put 21 projects worth $113 billion, including 16 railways and five airports, on the fast track.

The central bank has also quietly been making liquidity available to the banks through its medium-term lending facility. Such loans are a back-door way to push down interest rates without sending an easing signal. It is also three-month money that disappears after that time without also sending a countervailing tightening signal.

The central bank can always roll over the loans after three months should it choose to do so — although by the time they mature the economy may have gotten back on track through the simple expedient of lowering the official GDP target.

Leave a comment

Filed under Economy

China Adds More Speed Bumps To The Road To Rebalancing

THE PEOPLE’S BANK of China has reportedly injected some 500 billion yuan into the five biggest commercial banks in the form of short-term low-interest loans. This can best be regarded as a targeted monetary easing to perk up an economy at risk of falling short of its official target of 7.5% annual growth following a run of soft monthly economic indicators. Four months of a weakening property market, in particular, has culminated in noticeable economic sluggishness since mid-August.

Taking such action ahead of the October national day holiday, during which the banks traditionally face high cash withdrawals, gives the central bank a fig leaf from behind which to claim, should it be of a mind to explain its motives, that it is not indulging in old-school stimulus. Much of the new loans is likely to end up in the real estate sector and funding new infrastructure, however, and thus lay down more speed bumps along the road to rebalancing the economy.

Leave a comment

Filed under Economy, Uncategorized