China’s central bank chief sees end of monetary road in reforms
Zhou Xiaochuan says fiscal policy should come to the fore as China makes the painful transition from an export economy to a consumption model
Central bank chief Zhou Xiaochuan on Sunday called for greater use of fiscal policy to grapple with domestic growth and structural problems.
Monetary policy, he said, could be left to handle reflation, prevent an outbreak of financial risks and counter the spillover effects of an interest rate upcycle across the Pacific.
At a panel session at the Boao Forum for Asia, Zhou, 69, was reluctant to promote more liquidity support and appeared in favour of forcing painful restructuring.
“After so much quantitative easing in monetary policy, we may have reached an end of this period,” he said in what could be his last appearance at the forum as central bank governor.
Zhou took the helm of the People’s Bank of China in 2002 and is the longest-serving chief in its history. Widely regarded as a reformist and capable technocrat, Zhou revamped the state banking system, developed the country’s central banking scheme, liberated interest rates and promoted yuan internationalisation.
His one black mark is the loose monetary policy associated with former premier Wen Jiabao’s all-out stimulus response to the global financial crisis.
Some critics say the stimulus created a debt mountain equivalent to 261 per cent of gross domestic product and generated huge financial risks from shadow banking to asset bubbles.
Critics say the crisis was a missed opportunity to resolve structural problems and help the country transition from export-oriented and investment-led growth to an economy driven by consumption.
“If you have a period to emphasise structural reform and other long-term development strategies, you should not have overreliance on monetary policies,” Zhou said, adding that fiscal policy should play a key role in such reforms.
“We [also] need reform to streamline the relationship between central and local governments as well their responsibilities,” he said.
Zhou said the country could use monetary policy to address domestic reflation and various external pressures.
He said reflation was already taking place in some countries and there had been “obvious changes” this year.
China’s producer price index ended a four-year contraction in September and rebounded sharply, raising worries about consumer inflation as well.
In face of the US Federal Reserve’s three interest rate rises in the past 18 months and more possibly on the way, the PBOC has changed its tone to a neutral policy with a tightening bias.
China has also imposed tighter capital controls to prevent outflows and rapid depreciation of the yuan.
Tsinghua University finance professor Li Daokui, who is a former member of the PBOC’s monetary policy committee, said reforms were going slower than most wished and the government was worried about spillover effects from Fed moves on the Chinese economy.
“Zhou has tried to support the reform process,” he said.