Central banking 101: deny any decision until it's announced
Almost every economist expected China not to raise interest rates this year. Why did they get it so wrong?
'It was difficult to say otherwise when the head of the central bank had been so specific [that there would not be a rate rise],' the research head of a foreign securities house said.
Well, this is yet another lesson that to understand what happens in this country, you have to know the system and who is who.
Wind the clock back to October 11. The mainland's International Finance News - a People's Daily subsidiary - reported on its front page some important comments from Zhou Xiaochuan, the governor of the People's Bank of China (PBOC).
Zhou reportedly said: 'At this stage, there is no urgency to control inflation. However, the government has already formulated a set of medium- and long-term plans with high viability.'
He agreed that the excessive rise in property prices was the result of a lax monetary policy. But he said China would not raise interest rates this year and the policymakers were capable of managing property prices, according to the report.
The report was not carried by the Xinhua news agency. Yet, it was on the front page of an official newspaper and attracted no rebuttal from the central bank in the days following.
So more economists found little reason to bet otherwise. To the more prudent ones, Zhou's comments offered additional reassurance.
They argued that the mainland economy was already cooling down; food-driven inflationary pressures would decrease after a good autumn harvest; and a rate increase would attract hot money into the country.
Yet, on Tuesday Beijing announced a 25 basis point rate increase.
There are now different explanations for the about-turn. Some say inflation must be becoming wilder than expected. Yet the newly released September consumer price index came in well within expectations.
Some say the rate was increased to correct a real interest rate that was negative after accounting for inflation, in order to cool down property prices, as other measures appeared futile. Yet the housing market has been bubbling for some time. Why act only now? Some say Beijing is raising rates as an alternative to revaluing the yuan upwards, so as to avoid further pressure to do so from other countries at the upcoming G20 meeting.
The real reason will never be told. But one thing is for sure - Zhou is no Chinese Ben Bernanke but just one of many ministers. We need to consider not only his independence as a central banker but the weight he carries within the system.
A story that veteran mainland journalists tell may help make this clear. It was late 2003. For the first time since 1998, the PBOC increased the fraction of banks' funds that they must lodge with the central bank to 7 per cent from 6 per cent, to tighten liquidity. A commentary appeared in an official financial newspaper, saying the new policy was making life very difficult for small and medium-size banks, which were already struggling against the privileged big, state-owned banks.
Within days, the paper's editor received a call from Zhou. The central banker was not calling to complain about the criticism. Instead, he was fishing for an indication of the 'origin' of the story. Was it the editor or 'someone above'?
That was Zhou in the second year of his job. Years have passed. He has built up confidence and friendships in China's corridors of power and made himself one of the country's most recognised and respected financial faces worldwide.
But the system has not changed. Zhou is no different from other ministers who spend their timing making proposals, waiting for the state leaders' approval and calculating their political capital. Decisions on interest rate changes are no exception. Under the current model of 'consensual' leadership, various ministers provide their input. Zhou is one among many.
He may be very concerned about a widening of the interest rate gap between the yuan and the US dollar and the resultant influx of hot money as well as asset bubbles. But in the end, it is always a matter of who gets the leaders' ears.
In fact, this is not the first time Zhou has 'misled' the market. In 2004, inflation was much worse than now. The consumer price index grew at an annual rate of more than 5 per cent for three months. Every economist was calling for action.
On September 7, Zhou said: 'It's too early to talk about a rate hike. The central bank will have to study the August figures.' By October 4, inflation had risen to 5.3 per cent. In an interview in Washington, he said: 'The Chinese government has no plan to raise the interest rate. It will remain steady.' On October 29, Beijing announced a 0.27 point rise in the interest rate, the first in nine years.
Fool me once, shame on you; fool me twice, shame on me. You will remember it this time, won't you?