Tag Archives: Zhou Xiaochuan

China’s New Top Economics Team Picked To Push Reform

China’s new top economics team comprises horses for courses. Collectively they signal the intention of the new Xi-Li leadership to push ahead with economic reform. Individually they bring particular expertise that will be needed to overcome what are emerging as the biggest obstacles of reform, state-owned enterprises and local government.

Zhou Xiaochuan, as expected, will continue as governor of the People’s Bank of China. Regarded as the architect of financial markets liberalization since taking over as head of the central bank in 2002, he will likely drive forward further opening of the capital account and the internationalization of the yuan. The PBOC has long been thought to have pencilled in 2015 as the date for full convertibility of the currency. Zhou’s task will be to continue with lifting capital controls, liberalizing interest rates and developing capital markets.

Lou Jiwei becomes finance minister. The former head of the country’s sovereign wealth fund was also the architect of China’s tax reforms in 1994. His task will be to lift the tax burden on small and private firms, seen as important drivers of rebalancing the economy towards more domestic consumption, and to reform local-government finances so local officials cease to be reliant on land sales for revenue, and all the cosy dealing that goes along with that.  His objectives may be the politically most difficult facing the quartet.

Xu Shaoshi takes over as economic planner-in-chief as head of the Natinoal Development and Reform Commission. A former land and resources minister, his piece is to steer strategic investment away from spend-and-build real-estate plays and towards productive infrastructure.

Gao Hucheng, as commerce minister, doesn’t have the same scale of reforming role, but he will have to oversee the country’s exporters, moving them up the value chain and making sure that they don’t become an obstacle to reform as the economy rebalances away from being export- and infrastructure investment-led. At the same time he will have to deal with potentially increasingly tetchy trade disputes, both with China’s two biggest trading partners, the EU and the U.S., and with its regional neighbors, and with a patchwork of free trade agreements being negotiated in all directions. That potentially gives him both stick and carrot when it comes to domestic interests.

The sharp end of reform will be making China’s interest rates and currency more market driven and to open up the capital account. Expanding capital markets would end subsidised access to funds for state-owned enterprises. Expanding revenue-raising options beyond property development that local government officials have for years used to generate the local economic development on which their promotion depends, would cut to the heart of a massive web of  kickbacks and cosy deals with local developers.

The drive appears to be getting backing from the top.  Li Keqiang, in his first press conference as prime minister, warned that vested interests would be tackled. President Xi Jinping gives every impression he understands that reform is necessary to put China’s economy on a more stable long-term footing – and thus keep the Party in power. Vested interests and political hardliners are still to be convinced.


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Easing Inflation Gives China’s Policymakers Options They Don’t Want

Consumer price inflation ticked down again in September, being 1.9% year-on-year, down from August’s 2%. That was much as expected and leaves inflation running well below the official target for the year of 4%. Officials have been signaling 2.7% as the likely number for the full year.

That would still appear to leave policymakers plenty of headroom for further easing of monetary policy, should they choose to use it. The central bank has cut interest rates twice since June and lowered banks’ required reserves three times since November. Yet its main way to pump up sagging growth has been to open the liquidity taps. The broad measure of the money supply, M2, grew by 14.8% in September, its most rapid monthly expansion since June last year, and above the central bank’s 14% target number for the year.

However, the liquidity taps have been opened cautiously and with some trepidation by the central bank. Zhou Xiaochuan, governor of the People’s Bank of China, writing in the latest edition of the Journal of Financial Research, a house organ of the bank’s, is talking of closer to home when he warns of the inflationary risks in the efforts around the world to shore up the sluggish global economy by easing monetary policies. He encouraged central bankers to be ready to start mopping up operations.

At home, property prices are resurging, propelled by the increase in liquidity. Policymakers have fought a two-year-long battle to deflate the property bubble without bringing down the whole house of cards. They will not readily throw that hard-won victory to the winds. With third-quarter GDP growth figures due on Thursday, we’ll get a sighting of how much of the headroom that falling inflation has provided, the central bank has a taste for.

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China And The Next Head Of The IMF

Late last year the International Monetary Fund shook up its membership quotas to better reflect the growing tilt of global economic power to developing economies. China became the third largest member behind the U.S. and Japan, and ahead of Germany, France and the U.K. Its fellow Brics–Brazil, India and Russia–moved into the top ten. With that greater stake in the ownership of the IMF has come growing demands from the Brics for a commensurately bigger stake in the running the place. In particular, they want an end to the convention that the IMF’s top job, that of managing director, goes to a European, just as the top job at the World Bank goes to an American.

With the incumbent, Dominque Strauss-Kahn, now facing charges of sexual assault in New York, (and this Bystander assumes innocence until otherwise shown; DSK, as he is known, denies the charges and any wrongdoing) attention is turning to his successor. Could that be for the first time not just not a European, but someone from China, in keeping with the country’s new status within the institution?

Not to spoil the ending, but this Bystander doesn’t think it will happen this time. It is a generation of IMF leadership too soon. The name most mentioned as a possible Chinese candidate, People’s Bank of China governor Zhou Xiaochuan, now in his early 60s, may be a tad too old (IMF retirement age is 65, though that could be easily circumvented if necessary). Zhu Min, a deputy central bank governor now in his late 50s and who is a special assistant to Strauss-Kahn, the first Chinese to hold a senior position at the IMF, though U.S.-educated and a highly polished individual, may be seen as too much of a technocrat for what is also a highly political job, especially now bailing out Europe’s indebted nations is the IMFs first order of business.

There are other forces at work against a Chinese being the first non-European head of the IMF: Japan and India. Both neighbors would like the honor to be theirs, or at least not one of the other’s. India has the most credible candidate in Montek Singh Ahluwlia, one of the architects of the country’s economic reform, but at 67, age weighs even more heavily against him than Zhou. Japan has enough internationally seasoned economic diplomats to field a candidate but no name has emerged as a strong contender.

Even if China, Japan and India all agree that the job should go to someone from an emerging economy, getting the three to line up behind a single candidate will be tough. So there will be horse trading in support of a compromise candidate–and the geopolitical arm wrestling with the U.S. will get an additional dimension because the job won’t go to an American so Washington will have to play through a proxy. (There is a fuller discussion of possible candidates here.) That could swing the choice back towards a European–and Brussels will claim the eurozone crisis demands a European. While several Asian finance ministers have already come out in support of France’s finance minister, Christine Lagarde, none of Beijing, Delhi and Tokyo has endorsed her (and she has been quietly canvassing support in the region, having been expecting Strauss-Kahn to step down next year when it was thought he would have been running for the French presidency, an event that now seems unlikely and the top IMF job to open up sooner than expected).

Kemal Dervis, Turkey’s former economy minister now at the Brookings Institution in Washington, Trevor Manuel, a former South Africa finance minister and Agustin Carstens, governor of Mexico’s central bank, along with Lagarde, would probably comprise the bookmakers’ favorites. Stanley Fischer, the African-born American economist who is now a governor of Israel’s central bank, and a favorite in Washington, as an outside bet, though he, too, at 67, has an age handicap. So is former U.K. prime minister Gordon Brown as his successor, David Cameron, won’t back him saying the job should go to China or India.

What is certain is that none of the candidates can get the job with Beijing’s tacit agreement, and that will surely come at an as yet unspecified price in terms of even greater influence over the institution.

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Latest GDP, Inflation Numbers Signal Economy Back To Normal

The latest GDP and consumer price inflation figures confirm the economy is slowing more slowly than expected, which led to the surprise rise in interest rates earlier this week. The economy grew at 9.6% in the third quarter compared to the same period a year earlier. That is the slowest year-on-year quarterly growth of the year as the government continues to mop up after its stimulus package, but still faster than expected. Consumer prices rose by 3.6% in September compared to the same month a year earlier, the fastest increase in two years and well above the government’s 3% target rate. More expensive food, in the wake of the year’s abnormally bad weather, and housing were the reason.

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At an IMF conference on Monday, central bank governor Zhou Xiaochuan (right) said China faces increasing risks from excessive liquidity, inflation, asset bubbles and non-performing loans in the wake of the global financial crisis. While those may all be true, the latest economic data and the firmness of domestic demand and investment suggest the economy has weathered the crisis and is now getting back to normal. While more interest-rate rises and increases in banks’ reserve-ratio requirements are likely, they will be mainly intended to deflate the persistent property bubble.

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