China’s former central bank chief urges revamp of modern central banking

Zhou Xiaochuan, who was the head of People’s Bank of China (PBOC) for over 15 years until 2018, supports reform of the way inflation is defined and measured

US president-elect Joe Biden has flagged a cost of living index which factors in asset prices as well as the cost of public services

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US president-elect Joe Biden is believed to favour a measure of inflation that goes beyond the existing consumer price index (CPI) by factoring in asset prices as well as the cost of public services. Photo: AP

Published: 6:46pm, 27 Nov 2020Updated: 11:57pm, 27 Nov 2020

A former long-standing governor of China’s central bank has backed reforms to the way inflation is defined and measured to reflect new social and economic realities, a proposal that may lead to a wholesale retooling of modern central banking that has been serving the global growth since the early 1990s.

Zhou Xiaochuan, who was the head of People’s Bank of China (PBOC) for over 15 years until 2018, believes the popular practice of targeting inflation, which has been adopted by the United States, the European Union, Britain and Japan, is increasingly ineffective and outdated.

An important issue here is whether the monetary policies of major developed economies are still in line with economic and financial realities

Zhou Xiaochuan

Zhou argues that central banks could adopt a broader concept of inflation, something like the cost of living index flagged by US president-elect Joe Biden, with the measure of inflation going beyond the existing consumer price index (CPI) by factoring in asset prices as well as the cost of public services.

“A basic textbook on economic law of central banking is that excessive monetary easing (with money supply growing at a faster pace than [gross domestic product] growth) will lead to inflation. But this law is no longer working and the foundation of our knowledge is being challenged,” said Zhou in an article published by the PBOC on Friday.

“An important issue here is whether the monetary policies of major developed economies are still in line with economic and financial realities.”

Central banks in advanced economies are struggling to cope with ultra-low inflation rates even as benchmark interest rates have been cut to levels near or below zero.

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