CHINA has unveiled its first central bank law after 16 years of negotiations and revisions, but not everyone is satisfied with the final product. One third of the delegates at last month's National People's Congress (NPC) abstained or voted against the law before it passed. Conflicts of interest between central and local authorities, and between the People's Bank of China (PBOC), the NPC and the State Council remain unresolved. It is clear that the PBOC, now the central bank, lacks the independence enjoyed by Western central banks. But viewed in the social and political context of China, the new law still represents an expansion of the PBOC's power. Tao Liming, deputy director of the Institute of International Finance in Beijing, said: 'It is absolutely unrealistic to talk about the independence of the PBOC without taking into account the political framework, for it cannot operate as if it were completely separate from the State Council and the NPC. 'It is only with reform of the political institutions that the complete independence of the PBOC can become possible.' Two factors will determine the PBOC's effectiveness as a central bank and responsiveness to market changes: its credibility and its legal framework. While the PBOC's credibility will be based on its long-term performance, its legal framework will determine how much autonomy it has over monetary policies, according to WI Carr (Far East) economist Gilbert Choy. The law gives the PBOC the power to formulate and implement monetary policies independently, under the leadership of the State Council, China's Cabinet. But there is a catch. An added provision requires the bank to report to the Standing Committee of the NPC on its monetary polices and financial supervision. This is seen not only as an attempt to create more supervisory channels, but as a way to strengthen the NPC's power and help it overcome its image as a rubber stamp. Benny Chiu, research manager of Hongkong Bank China Services, said it was necessary to put the PBOC under the leadership of the State Council to improve co-ordination between the Planning Commission, the Ministry of Finance and the PBOC. A China expert pointed out that the role of the Central Financial and Economic Leading Group of the Politburo would likely remain an indirect component of the central bank's legal framework. While the Politburo, the party's nucleus of power, gives no specific orders, its intentions are translated into policies by the State Council. But duplication of supervision may just complicate the situation. Mr Choy worried that reporting procedures would be time-consuming, hindering the PBOC from responding quickly to market changes. Under the central bank law, the PBOC's monetary policy will concentrate on maintaining the stability of the yuan and promoting economic growth. That means the PBOC's main goal will be to control the money supply. This year, money supply was projected to grow by between 20 to 24 per cent, down from about 30 per cent last year. But what would happen if the PBOC's monetary policy and the central Government's economic policy were at odds with each other? China's unemployment problem may prove to be the first real test of the central bank's power. If unemployment becomes serious, the central government might demand that the bank pump capital into the market to stimulate growth. If the PBOC agreed to boost the money supply, inflation probably would soar, jeopardising the stability of the currency. But if the bank refused, a high unemployment rate could lead to widespread social unrest. This kind of conflict is apparent already at the regional level, with local authorities asking for money from domestic banks to fund infrastructure development, according to Mr Tao. 'It is in the immediate interests of the local authorities to ask the banks to pump more money into the development of their areas, but this leads to malpractices in fundraising,' he said. The central bank law, which contains provisions prohibiting the PBOC from providing loans to local authorities, organisations and individuals, is an attempt to break ties between the local authorities and the bank's branches. But merely centralising lending approvals does not entirely resolve the conflict, Mr Tao said. Rulings that funnel all bank loan applications through the PBOC's head office and bar local authorities from raising funds overseas without prior approval will only compel the local authorities to press the central government for more funding. But many economists say the PBOC's authority would be limited, leaving the State Council to make the choice between pursuing economic growth or monetary stability. The creation of a monetary policy committee raises another question mark. Many delegates to the NPC protested its establishment because the central bank law does not include any details about its scope or power. Others were angry because the NPC would not have a direct say in the committee's formation. To be sure, the committee will be formed within the PBOC, obviating worries that it would weaken the power of the PBOC if it were independent under the State Council. However, it does not need to be a decision-making body, as the State Council remains to be the governing body of the PBOC. The PBOC formed a board of directors in 1984, composed by the governor and deputy governor of the PBOC head office, the heads of the four specialised banks, the deputy director of State Planning Commission, the vice-minister of the Ministry of Finance and several economists. It was only an interim organisation, and only a few meetings were convened before it was dissolved. Monetary policy was thereafter set by the State Council. It is not known why the board was dismissed, but Mr Tao said it did not play a big role. He said the composition of the monetary policy committee might be similar to that of the board of directors. It would be an advisory body, leaving only decisions of the highest importance in the hands of the State Council. Other aspects of the law also require supplementary regulations. For instance, branch restructuring is essential to simplify the structure of the PBOC, yet this is not mentioned in the central bank law. Huang Guobo, a lecturer in the economic and finance department of the City University of Hong Kong, said the issue was too complicated to put in the law because it required balancing the interests of the local authorities and bank branches. Reduction of local branches should be followed by re-establishment of a new network system and a balance of interests. Indeed, the interests of local authorities complicate matters immensely. Appointing directors to the local bank branches requires prior consultation with and approval from the local party committee. Given the complexity of the economic and political situations, the leaders of the PBOC will need to become more sophisticated managers of monetary policy. Zhu Rongji, the current governor of the PBOC, has been reported to want to step down in order to concentrate on his work as vice-premier of the State Council. No one seems to be willing to replace him and it is not difficult to see why. Whoever succeeds him also could well become a scapegoat if economic reform suddenly becomes economic turmoil.