China’s central bank chief says his job is too difficult for many people to understand

Beijing’s monetary policy must target a slew of different – sometimes conflicting – goals and is decided upon using complicated models that may go beyond the average person’s comprehension, says China’s central bank chief.

In an English-language lecture on Friday at the International Monetary Fund (IMF) in Washington, dotted with technical terms such as “Structural Vector Auto Regression models” and “Dynamic Stochastic General Equilibrium”, Zhou Xiaochuan, governor of the People’s Bank of China, explained “the objectives, roles and practices” of the the PBOC in a broad historical and global context.

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China has largely calmed concerns about the yuan in the past few months after a sudden revaluation last August and associated poor communication roiled global markets.

Indeed, the yuan’s volatility was the smallest recorded among major currencies following Britain’s vote in favour of leaving the European Union on Friday.

Zhou’s latest lecture was more of a general account of the PBOC’s unique policy position, rather than a knee-jerk clarification about specific events.

One key message from Zhou is that the PBOC has to do more work than its peers in mature markets to serve China’s economy, which is changing from a planned system to a market-based one.

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Such a delicate mission of multitasking meant the central bank had to use complicated models that could be difficult to explain to the general public about what it was actually doing.

“Complicated models pose challenges over communication between the central bank and the public,” Zhou said, according to the video and transcript of his lecture, which was posted on the IMF’s website.

Models used in policy decisions by central banks were “dynamic and in the form of a vector [a quantity that has direction as well as magnitude]”, but the general public “tends to think in a scalar way [in terms of magnitude only, not direction], and their logic is usually expressed in words, rather than in a vector”.

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“Complication and complexity are unavoidable, and the difficulty in communication is, in essence, a reflection of the complexity of reality,” Zhou said.

“If the communication is simple, although it can be better understood by the public, it may fail to reflect the complexity of the issue at hand; and if the communication is too complicated and technical, it can be understood only by a few economists and market participants.”

Global central banking is entering uncharted territory in terms of negative interest rates and market swings, and there is no set answer yet about what is the best communication strategy for a central bank.

While the US Federal Reserve was trying to guide market expectations via forward guidance, Zhou said China preferred to let “experts” know first and then allow the information to “trickle down to the public”.

Zhou, the longest serving central bank governor among the Group of 20 major economies, is now in his 14th year as the PBOC chief and is widely recognised for his role in facilitating China’s economic rise, in developing domestic financial markets, and promoting the yuan’s global status.

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The host of the lecture, the IMF managing director Christine Lagarde, showered praise on Zhou in her welcoming remarks.

She said Zhou was “one of the helmsmen of Chinese economy” and “a world-class intellect”, who spoke “the same language” as other global leaders and policymakers.

In his speech, Zhou said that the central bank’s shift between different policy goals at different times often put it at the centre of controversy.

Zhou noted that the PBOC was blamed by some for creating excessive credit growth, high leverage and shadow banking.

“For central banks with a single objective, it is relatively easy to be independent,” Zhou said.

“However, if a central bank has multiple objectives, it may be harder to be immune from the political reality.”

Nevertheless, Zhou said China’s policy “will become more simplified and international experience will be of more practical relevance to us” once China’s transition to a market economy was completed.