The Hindu Business Line : China's Central Bank Governor — Mover and shaker in China's financial system

TURNING to central bankers, in general, the world has come to regard Mr Alan Greenspan, America's central banker, as an economic statesman of global significance. His every move, every gesture was watched by markets with bated breath to infer what they could convey about his forthcoming decisions.

Huge fortunes seemed to depend on his decision or indecision to change the interest rates. Also, the markets depended a great deal on interpreting Greenspan's, often luminous and, sometimes opaque disquisitions on the behaviour of America's temperamental bourses, including the time when he upbraided them on their "irrational exuberance".

When it came to the successor chosen to follow Mr Greenspan, financial observers went to town discussing the quirks and merits of Prof Ben Bernanke, his fixation on inflation targeting and, not least importantly, his sartorial behaviour. This is not to deny that much turns on Bernanke's policy decisions.

It is significant that proportionately less space and attention has been devoted to another person who occupies an equally important position, if not more important, in global finance, China's Zhou Xiaochuan, Chairman of the People's Bank of China (PBOC), which is China's central bank. Little is known of this powerful central banker, except what comes out in occasional snippets in the Western press. Perhaps, he believes in the maxim "the best central banker is one who is seldom seen but often heard to act".

A modern economy, with its intricate interplay of banks and capital markets, has come to regard central banking with the awe and respect due to its central role in regulating and modulating the flow of money and resources. The art of central banking has its own pantheon.

The heroes in the pantheon range from our own I.G. Patel, Manmohan Singh and Rangarajan to legends like Alan Greenspan and Paul Volcker of the US, Eddy George of the UK and de Larriossere of France. The mystique has gained because of the rise of central bank independence.

Business Week, in its December 12-19 issue, has published what appears to be the best detailed feature on the PBOC's Chairman Zhou. It details a profile of his career and his policy stance on matters of importance to China's economy and, hence, to the global economy at large.

Excellent academic and banking credentials

A trained economist with a Ph.D. in Economics from China's premier University, Tsinghua University, in 1975, he was first trained as a Chemical Engineer at Beijing Chemical Engineering Institute. Zhou started advising the Chinese Cabinet in 1986. He later became head of one of China's largest state-owned banks, China Construction Bank (CCB), from 1998-2000. He thereafter became Chairman of the Securities Regulatory Commission from 2000-2002, after which he became Governor of PBOC in December 2002.

Governor Zhou has both excellent academic and banking credentials. He is also a Communist Party member, as most important officials in China have to be. He is not, however, afraid to take a politically unpopular stance in matters economic. His recent speeches show that he wants to open China's financial sector to Western investors, and build robust corporate bond and stock markets.

Dr Zhou has maintained pressure on Chinese banks to clean up their act and develop into competitive financial players. Specifically, and in blunt terms, he has stated that in this connection he wants an end to what he calls the "planned economy mindset". He is no less a dedicated communist for all that.

On the crucial issue of China's exchange rate management, Governor Zhou favours a more flexible currency regime and the eventual lifting of capital controls as also a fully floating yuan. It is no secret that he was the principal force behind China's recent decision to move away from the yuan's fixed peg to the dollar to a managed float against a basket of currencies.

Governor Zhou appears confident that, contrary to fears of conventional economists, an appreciating yuan will not damage China's competitiveness, given China's low labour costs. Business Week reports that Governor Zhou recently demonstrated his faith in the new policy when he sold $6 billion to ten Chinese banks in exchange for yuan, and with a promise to take back the dollars in 12 months for 2.9 per cent less than the current exchange rate.

This action demonstrates clearly that China's central bank expects the currency to appreciate at least by that extent a year from now.

Operations by foreign banks

Governor Zhou has also led the ongoing liberalisation of China's financial system. He has allowed foreign currency operations by foreign banks in 18 Chinese cities and, in the meantime, liberalised permission for foreign banks' branches. By the start of 2007, more foreign banks will be able to open branches on the mainland. These include Citigroup and HSBC. Incidentally, these banks have been running branches in India for the last many decades.

Dr Zhou had played a lead role in running China's Construction Bank for two years and led its attempts to raise moneys. CCB ran a massive initial public offering in October 2004, raising $9.2 billion, an offering that attracted thousands of foreign investors. CCB's stock price has since risen by 2.5 per cent.

Dr Zhou has had to defend these operations against public criticism, which centred on the fact that the market prices of the stock had risen since the initial sale and private investors had benefited. Zhou has taken the reformer's defence that the IPO had served the broader goal of financial reform and not merely of raising funds.

Dr Zhou has been an unconventional central banker, taking the lead in organising strategic sales to foreign investors in state-owned central banks. He is on record as saying that he welcomes such strategic partnerships, mainly as a means of upgrading the banks' performance.

He also recently defended an unusual provision in the strategic sale agreement to Bank of America and Singapore's Temasek, under which they will receive compensation if the banks underperform in terms of financial returns. A bold initiative that testifies to Zhou's faith in running the banks to better standards of financial performance!

Governor Zhou has the reputation of a tough task-master. As head of the Chinese Securities Regulatory Commission, he acquired the nickname of "Flayer" for his tough regulatory stance. Similarly, in early 2004, he took tough decisions to keep the Chinese economy from going off the rails due to an investment boom. Dr Zhou's team implemented the Government's plan to "raise reserve requirements, impose quotas on lending to scorching sectors, such as steel and automobiles, hike interest rates and crack down on property speculation".

Balancing act

Governor Zhou has a difficult task of managing the booming economy, keeping in mind the likely criticism of his opponents, who may not like his blunt ways. He has, above all, the task of managing the deployment of his hoard of $750-plus billion. Any decision by him to move away from American gilts could mean a heavy blow to the global markets, calling for a rise in US' interest rates and increasing the cost of managing the US' deficit.

He has also to keep in mind the critics in the US Congress, who are threatening punitive sanctions in the shape of duties on Chinese exports to the US if the currency flexibility does not play according to their desires. Fortunately, US legislators have been recently advised by the US Treasury to be less aggressive, possibly because of the political level talks between President Bush and his Chinese counterpart. Governor Zhou and the PBOC have a difficult task on their hands. Perhaps, it is more difficult than that faced by Alan Greenspan in his charge at the Fed. For one thing, the Chinese economy is a developing economy, albeit booming at a rapid rate. For another, Dr Zhou has the political compulsions of working in a less open society than the US. If he steps out of line, his career may well come to an abrupt end. With all the risks and problems he faces, observers feel that he is the best bet for success in China's financial and economic reform processes. He has an open mind and a disposition that enables him to be a mover and shaker in the Chinese political system.

China's Greenspan has as much relevance to the global economy as Ben Bernanke. In fact, Governor Zhou may even be in a position to dictate to his US counterpart what his stance on interest rates should be. Much rides on Dr Zhou's decisions. Some observers forecast that, considering his success so far, Governor Zhou may well be on a career path that may end at the highest post in Beijing. That is, of course, provided he is able to avoid the risks that are inherent in a political career. Dr Zhou should know. He is himself the son of a former Chinese Minister who faced political exile consequent on the cultural revolution. But barring such obstacles, Dr Zhou may yet do a Manmohan Singh. The world waits to see how Governor Zhou will fare. One can only wish him a charmed career, if only for the greater progress of China and, hence, of the global economic system.

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