Jake's View

China’s central banker hasn’t left quite the legacy some might credit him for

After 15 years at the helm of China’s central bank, has Zhou Xiaochuan left a fine record, or was it just plain bad steering?

PUBLISHED : Wednesday, 16 August, 2017, 6:02pm
UPDATED : Wednesday, 16 August, 2017, 11:05pm

Since taking the central bank’s reins in December 2002 ... Zhou [People’s Bank of China Governor Zhou Xiaochuan] has steered the nation through global crises, overhauled monetary policy tools, ended a direct peg to the US dollar, abolished a cap on deposit rates and overseen the elevation of the yuan to reserve currency status. - SCMP Business, by Bloomberg, August 16

A fine record indeed to look back on, for a central bank chief after 15 years in the job – but let’s look at some of these accomplishments more closely.

Steered the nation through global crises

Make that one global crisis, not two or more. It was the 2008/09 crisis and, yes, the People’s Bank of China responded with a relaxation of interest rates, further loosening an already loose monetary policy.

But while it may have been a global crisis, it could not have been much of one for China if the official figures are correct in saying that economic growth never slipped below 6 per cent throughout.

Bear in mind also that in the two years immediately before this crisis, the PBOC’s easy money practices created an investment bubble that sent prices up more than fivefold on the Shanghai market before the inevitable collapse resulted. What shall we call this particular bit of monetary steering then?

Overhauled monetary policy tools

It is a good question what the words “monetary policy tools” mean, in a country where commercial banks must look to the state for direction on whom they lend to, and on what terms.

A central bank in a state-directed economy is an executive arm of the central government. It carries out policy. It does not make policy.

But Zhou does wield one sledgehammer of monetary policy tool. This is the statutory reserve requirement, a hangover of earlier and less advanced central bank practices.

It’s little use today outside China, this form of reserves requires that commercial banks place a defined percentage of their deposits with their central bank in cold form. The money just sits in the central bank’s vaults, so to speak.

Zhou’s term of office saw aggregate financing balloon almost twelvefold to 168 trillion yuan, resulting in huge over-capacity in key industries and growing instances of malinvestment. And that’s just plain bad steering

Under Zhou’s guidance this percentage rose from 7 per cent to a stinging 21 per cent in 2011, which would ordinarily have been enough to stop the economy cold in its tracks.

The reason it didn’t in this case is that the money was never kept cold in the PBOC’s vaults. It was immediately re-routed back into the economy in payment for mopping up a vast inflow of US dollars from trade surpluses. The dollars were then used to build up foreign reserves to US$4 trillion.

These numbers no longer look so bad, but the point is that it was only done to manipulate the yuan’s external value. This was not a monetary policy tool, but a crude way of rigging the exchange rate.

Get this man away from the wheel of any bus I ride if that’s how he steers.

Ended a direct peg to the US dollar

No he didn’t. The yuan is still as pegged to the dollar as it ever was, except that now it is a floating, rather than a fixed-rate peg. A fixed-rate peg is at least subject to some discipline. A floating rate peg is determined purely by central bank whim.

Abolished a cap on deposit rates

Let me see now. Eight years ago, the savings deposit rate was 0.36 per cent. Now it’s 0.35 per cent. Someone needs to look up the definition of “abolished.”

Overseen the elevation of the yuan to reserve currency status

This mistake was actually made by the International Monetary Fund’s head Christine Lagarde, who accepted the yuan as a base currency for the IMF’s special drawing rights (SDRs) long before it met the requirements.

I nonetheless blame Zhou for pushing too hard. SDR inclusion is not a badge of honour but acceptance of an obligation to help financially troubled countries.

A country that rigs its exchange rate and has again slapped strict capital controls on its own population does not meet the criteria for the club.

Most of all, Zhou’s term of office saw aggregate financing balloon almost twelvefold to 168 trillion yuan (US$25 trillion), resulting in huge over-capacity in key industries and growing instances of malinvestment.

And that’s just plain bad steering.