Now, China's central banker wields the power of the unspoken word

PUBLISHED : Monday, 01 August, 2005, 12:00am
UPDATED : Monday, 01 August, 2005, 12:00am

China's central bank chief Zhou Xiaochuan is a soft-spoken, scholarly bureaucrat who chooses his words and his occasions carefully.

But from now on, he will have to be even more cautious in what he says.

When China revalued the yuan by 2.1 per cent on July 21, Mr Zhou joined the elite club whose members include Alan Greenspan, Toshihiko Fukui, Jean-Claude Trichet and Mervyn King, whose words count for more than most heads of state.

By de-linking the yuan from the US dollar and allowing it to float against a basket of currencies, Mr Zhou has put it in play in the trillion-dollar foreign exchange market.

Last week in China was a re-run of how the Bank of Japan acts to stop investors driving up the yen, with the People's Bank spokesman on Tuesday, then the People's Daily on Wednesday telling people not to bet on the yuan, and then Mr Zhou's deputy on Thursday warning companies that they must learn to manage currency fluctuations.

This is just the beginning. From now on, every word Mr Zhou utters in public will be analysed and argued over for hints of a revaluation. Even his silence will be an object of scrutiny by the markets.

Given estimates this year of about 9 per cent gross domestic product growth, a trade surplus of about US$70 billion and foreign exchange reserves of more than US$700 billion, economists expect a gradual revaluation of 2 per cent to 7 per cent over the next 12 to 18 months. The price of one-year non-deliverable yuan forwards in offshore markets already reached 7.75 to the dollar last week.

If any Chinese bureaucrat can handle the pressure of managing the country's currency, Mr Zhou may be the one. Of all the central bank governors China has had during the post-1949 era, he is the most knowledgeable about economics and the country's place in the world.

Born in 1948, Mr Zhou graduated from the Beijing Chemical Engineering Institute in 1975 and in 1985 gained a PhD in economic systems engineering from Qinghua University, the alma mater of many government and Communist Party leaders.

Between 1979 and 1985, he researched economic and financial policy, publishing widely. In 1986 he began to propose policy as a member of the drafting committee of the Commission for Restructuring the Economy under the State Council, working closely with Wu Jinglian, one of China's most influential economists in the past 30 years.

From 1986 to 1989, Mr Zhou held his first administrative post, as assistant to the minister of foreign trade. He has published more than 10 books and over 100 academic articles in Chinese and foreign publications.

It is this background that makes Mr Zhou not only able but eager to explain his policies to the public - not a requirement for a leader in the Communist government, which prefers discretion to discussion.

On the evening of the announcement, Mr Zhou was watching television in his office, to listen and evaluate reaction to the news at home and abroad.

On July 23, he went on Focus Point, a 20-minute programme that follows the main evening news at 7.30pm, with an estimated audience of 300 million, to explain the decision. He also gave his reasons at a banking conference in Beijing that day, with his speech published in the print media. In this, Mr Zhou resembles a western central banker more than a Chinese one.

A prolific writer, he also likes to put his thoughts down on paper.

In an article in Caijing, China's most influential financial magazine, he explained how he reached the decision to revalue.

The move followed an intense debate between advocates of the dollar peg and those who wanted a floating rate. While each side had its arguments, the merits of a float outweighed the old system in a global environment where prices of currencies and raw materials change rapidly.

'The reform of the exchange rate reflects the changes in the global economic and trading system and the flows of capital. We made this change according to the needs of our economy and to optimise the use of our resources. This decision is not the result of discussions with other people. This I must make clear,' he said, referring to China's reluctance to yield to US pressure on the issue.

But Mr Zhou's challenge in managing a floating currency has barely begun. Until July 21, the yuan was pegged to the US dollar and the market barely moved. As of July 22, it has been able to move 0.3 per cent each day either side of a set point for the currencies in the basket. As trading volumes and volatility have expanded, the bank needs to decide when and how to intervene in the market.

Mr Zhou will need to learn to use rhetoric rather than action to talk up or down the currency, a tactic regularly used by other central bankers. Welcome to the 'read my lips' club.