These Are the Five Biggest Tests Facing China's Next Central Bank Chief - Bloomberg

These Are the Five Biggest Tests Facing China's Next Central Bank Chief

Bloomberg News

November 23, 2017,

From regulation to communication, many PBOC tasks are in flux

Taming debt levels will be a key responsibility for new chief

The People's Bank of China headquarters in Beijing. Photographer: Qilai Shen/Bloomberg

When Zhou Xiaochuan finally hands over the baton at the People’s Bank of China after a decade and a half in charge, his successor will inherit a series of headaches crowned by a debt pile racing toward 300 percent of output.

The next governor will be tasked with not just reining in that leverage without tripping up economic growth, but keeping an eye on accelerating inflation too, all as the institution’s role in a complex regulatory structure evolves. As if that wasn’t enough, they’ll also be tasked with maintaining a stable currency as it opens up to market forces and boosting communication to keep global investors in the loop.

Zhou XiaochuanPhotographer: Qilai Shen/Bloomberg

"The PBOC is in more of bind than ever with its monetary policy," said Zhao Yang, chief China economist at Nomura Holdings Inc. in Hong Kong. "While it was fine to just look at inflation and economic growth targets in the past, the central bank now has to strike a balance among more targets, some of them conflicting."

China’s appointment of a new PBOC governor may be imminent, after Zhou last month signaled his retirement. Zhou is already helping set the agenda for his successor, having warned in October about the risk of a collapse in asset prices after the popping of a credit bubble. Here are five of the most pressing tasks that will be on the new chief’s docket from day one.

If the $40 trillion financial sector is a ticking time-bomb, then the PBOC governor will be among those sweating over which wire to cut. Reducing risky inter-bank lending, weeding out dangerous behavior by asset managers, and corralling internet credit will all be key tasks, all while trying to prevent funding to the real economy from cratering.

While it’s done a decent job so far with that balancing act, the central bank now also must find its place in a new regulatory structure for the bodies in charge of oversight. Whether the PBOC is the leading light of this effort or one among many may depend on the profile of the new governor. And the clock’s ticking -- the financial sector faces further shakeups now that authorities have lifted some curbs on foreign ownership.

Policy Framework

How the PBOC interacts with markets in pursuit of its nominal policy goals -- maintaining stability in the value of the currency and thereby promoting economic growth -- is undergoing a shift. From the credit quotas of the planned-economy era that focused on the quantity of money in the system, the central bank is ultimately headed toward letting short-term interest rates set the price of money, as its global peers have long done.

Under Zhou, the PBOC has developed a bewildering array of instruments to guide market rates -- but now it’s trying to focus attention on just two at a time when it’s actually increasing the range of maturities it uses.

Streamlining the policy framework will be a key task for the new governor, especially as the central bank has already announced that it’s moving to a "two-pillar" system that pairs rates policy with tools geared to regulate prices of financial assets.

Communication

Of the world’s major central banks, the PBOC talks the least. Whereas Federal Reserve and European Central Bank officials give hundreds of policy speeches each year, Zhou does just a handful.

There are signs, though, that the central bank wants to better explain itself to markets, and has slowly increased commentary this year. In an ever-more complex market environment, Zhou’s successor may have to engage in open-mouth operations a little more.

Currency Management

Managing China’s massive capital inflows and outflows, and their effect on the yuan, complicates PBOC efforts to regulate the amount and price of liquidity in the market. It’s a task they may ultimately be glad to be rid of, but for now heading toward a freer-floating yuan is something that the next governor is likely to continue.

Moving in that direction may aid another big goal for Beijing: boosting global use of the yuan. Despite the International Monetary Fund conferring a reserve-currency status last year, the currency’s share of global payments is down from a 2.79 percent peak in August 2015.

Inflation

With hefty financial-sector and currency tasks already on its plate, it would be easy for the PBOC to forget a little about its inflation mandate. With a damaging episode of runaway inflation in the 1990s in mind though, Zhou’s successor should keep a close eye on developments.

Consumer prices adjusted for food and fuel held at their fastest since 2011 in October, evidence that surging factory prices are beginning to feed through. The government’s drive to reduce pollution could also spur inflation, making a tightening of policy not unthinkable.

While PBOC has to take instruction from the State Council for major policies, the governor can always leverage his knowledge and experience to guide the direction of the policy debate, said Ding Shuang, chief economist for Greater China & North Asia at Standard Charted Bank Ltd in Hong Kong.

"It’s an important ability to make good arguments for its policies to top leaders, which helps the PBOC find a louder voice among policy makers, even though it may not enjoy full independence," he said.

— With assistance by Yinan Zhao