By Scott Kennedy —
Last Saturday at 10:00 a.m., Zhou Xiaochuan, governor of the People’s Bank of China (PBOC), held a press conference during the annual session of the National People’s Congress (NPC). Flanked by his deputies, his task was to reassure the world that China’s economy is sound and the renminbi (RMB) is near equilibrium. He apparently performed well, as the Shanghai index and the RMB both strengthened on Monday, and it appears as if the recent market volatility may for the time being be a thing of the past.
But Zhou and his colleagues should not be overconfident. There is still a great deal of anxiety about the state of the economy and skepticism about the likelihood of far-reaching market liberalization. Equally important, even though he has a well-deserved reputation as a reformer, Zhou’s ability to speak to markets is constrained by one simple fact: the PBOC is not an independent central bank. It does not determine monetary policy or China’s exchange rate on its own. Instead, it is one of multiple voices. The ultimate decision on lending and deposit rates, bond issuance, whether to peg the RMB, how wide to open China’s capital account, and many other critical questions are made elsewhere, and then the PBOC implements these policies. Moreover, another sign of its limited autonomy is that part of the PBOC’s mandate is to support the economic priorities of the leadership, not just price stability.
As we know all too well, having an independent central bank is no guarantee of avoiding financial crises or achieving sustainable growth. But the more independent a central bank is, the more likely it can focus on the economy’s basic fundamentals without regard for short-term political expediency, thereby raising the chances it will serve the public’s interest.
The shackles on the PBOC have enormous consequences for how effective Zhou can be as a central banker, which in turn constrains his ability to speak to markets and persuasively explain China’s economic trajectory.
Public Communications by Various Central Bankers (January 2015–February 2016)
|Mario Draghi||European Union||39||5||14||10||10|
|Mark Carney||United Kingdom||22||3||9||5||5|
|Janet Yellen||United States||19||6||7||2||4|
Source: CSIS own calculations based on the websites of central banks, other government agencies, and media reports.
One of the most notable consequences of his limited independence is how infrequently Zhou speaks in public. Yes, in the last few weeks he’s been quite visible, via a lengthy interview with Caixin Media (see my commentary, “Not Your Average Zhou”), then at the G20 meeting of finance ministers and central bankers in Shanghai, and most recently at the NPC session. But based on our culling of public records, in comparison to his counterparts, Zhou is decidedly quiet. Between January 2015 and the end of February 2016, Zhou publicly communicated only 14 times, and fully half of those events were in the first two months of this year. In his 14 years at the helm of the PBOC, Zhou has never formally testified before the NPC, which is true of most Chinese ministry heads. He occasionally gives speeches and makes informal remarks and only rarely gives media interviews. Zhou and his staff certainly wrote their answers to the questions for the Caixin interview in February, and it’s possible they even wrote some of the questions.
Granted, the PBOC communicates publicly in other ways, through data and policies on its website and statements made by its deputy governors and other lower-level officials. But these efforts are not substitutes for the limited public engagement by Zhou himself.
The contrast with advanced industrialized economies with independent central banks is stark. Janet Yellen, Mario Draghi, and others regularly testify before their legislatures, make major speeches, and communicate in other ways. The need for Draghi to be verbose is higher than others since he has to engage with over two dozen national constituencies and the European Commission and Parliament. Yellen speaks more often than Zhou, but she actually is more reserved than her predecessors. In 2005, the last full year of Alan Greenspan’s tenure at the Fed, he communicated with markets on 36 occasions, including testifying 12 times, giving 4 speeches, and offering informal remarks on 20 occasions. (He did not grant a single interview that year.) Ben Bernake was less talkative, communicating 25 times in 2013. Lest you think Zhou’s reticence is an Asian cultural characteristic, the world’s most communicative central banker is Japan’s Haruhiko Kuroda, who regularly testifies before the Diet and holds biweekly press conferences.
Look at the company Zhou does keep. Russia’s Elvira Nabuillina and Brazil’s Alexandre Tombini are also relatively tight-lipped. The autonomy of these three central bankers is constrained through formal and informal mechanisms, and they all lack the power to independently determine monetary policy. Since Zhou cannot set interest rates or the RMB’s level on his own, one cannot be sure when he steps in front of a microphone whether the words he utters are his or someone else’s, or whether his opinions will hold as ultimate policy. On Saturday, he awkwardly defended the current monetary policy as “prudent,” even though credit growth jumped dramatically in January, and there could be substantial loosening of the money supply as the year progresses. This sounded more like the official line than a well-considered position.
Not only is Zhou not powerful, there is no standard rhythm or tempo to Chinese monetary policy. By contrast, in the United States the Federal Open Market Committee (FOMC) meets on a regular schedule. There is a well-rehearsed ballet among members of the Fed, analysts, and the media before, during, and after these meetings. Fed members offer signals in advance of the meetings to set public expectations, and the decisions and carefully worded explanations that emerge from these meetings are then parsed again. (This interactive signaling and tea-leaf reading is the one area of Western governance that bears any resemblance to Kremlinology or its Chinese parallel, Zhongnanhai-ology.) There is no parallel timetable for Chinese monetary policy, and decisionmaking occurs inside a black box impenetrable by outsiders. Zhou never speaks in anticipation of an impending decision all know is coming. Hence, it is challenging for the public to form expectations around what he says because the context in which he speaks is never precisely clear.
The constraints on the PBOC, as with other government agencies, seem to have only grown under Xi Jinping. One well-connected Chinese financial expert, upon hearing my exasperations about Zhou’s recent five-month silence, recently told me, “Don’t pay attention to Zhou. His administrative rank is not that high. To understand Chinese policy, you need to pay attention to the Party Center.” Translation: the only authoritative voice on Chinese economic policy is Xi Jinping.
Following the G20 meeting in late February, Zhou hosted a private gathering with several of his central bank counterparts in Hangzhou, about an hour’s ride from Shanghai by high-speed rail. The meeting was intentionally modeled on the annual pilgrimage to Jackson Hole, Wyoming, hosted by the Federal Reserve Bank of Kansas City, where central bankers, their staffs, and a select number of the world’s leading economists are invited each August to exchange ideas about the world’s most pressing economic issues. Zhou has traveled to Jackson Hole, and he is reported to enjoy tennis, the sport of choice among central bankers. Hangzhou was China’s effort to further embed itself within this global brotherhood.
But as long as the PBOC is not independent, no matter how well China’s central banker understands economics or swings a tennis racquet, China will be the odd man out in this club, and markets everywhere will continue to take his words with a large grain of salt. Hence, one would not be surprised if last weekend most Chinese switched the channel from Zhou’s press conference to a soccer match, an event that offers far more drama and is easier to tell the score.
Dr. Scott Kennedy is deputy director of the Freeman Chair in China Studies and director of the Project on Chinese Business and Political Economy at CSIS. Follow him on twitter @KennedyCSIS. CSIS Freeman Chair researcher Megan Kelly provided invaluable research assistance.
Thumbnail image of Zhou Xiaochuan from Wikimedia, U.S. Government Work.
Dr. Scott Kennedy is senior adviser and Trustee Chair in Chinese Business and Economics at CSIS.