It was reported by the Wall Street Journal that China's central bank governor Zhou Xiaochuan will soon be retiring, and the main candidate to take his place is the incumbent governor of Shandong Province, former China Securities Regulatory Commission (CSRC) chairman Guo Shuqing. As the news spread, Chinese investors cheered and some even crowed: "No wonder the stock market has recently rallied!" The question then arises: What is the influence of a change in the central bank's governor?
First, we have to ask about the authenticity of the news. Currently, the replacement of China's ministerial officials does not follow a formal, official, written form of clear process. In most cases these changes are led by customs which have been formed within the party. The new top leaders of the central government follow and abide by these customs, but they often also make flexible adjustments. For example, about two years ago, when Zhou Xiaochuan was approaching the retirement age of 65 for ministerial officials, he continued to chair the central bank after being elected Vice Chairman of the national CPPCC, and thus being listed among the national leaders whose retirement age boundary is 70.
In addition, even if Zhou Xiaochuan does not continue in his role as the central bank governor, he is likely to continue to exert a significant amount of influence in the financial area as the Vice Chairman of the national CPPCC. For example, another Vice Chairman of the CPPCC, former chief executive of China Development Bank, Chen Yuan, is responsible for preparing for the creation of the BRICS Development Bank, and the China-led and initiated Asian Infrastructure Investment Bank also needs a strong leader, so this could be an excellent place for Zhou Xiaochuan to continue to keep his hands on the financial levers.
Since the current appointment program for key officials is not transparent, this is not the first time that similar messages have been disclosed by the foreign media earlier than their Chinese counterparts.
If the central bank is very likely to replace its leadership, then what influence will the move have on China's economic policies, and in particular on the financial and capital markets?
Dr. Nicholas Lardy, a Chinese issue expert, said that the governor substitution will not cause any major changes in monetary policy, implying that this move is insignificant. I see it as the Chinese central government sending a powerful signal of financial reform to the outside world. The reasons are as follows:
First, China's national governance is different from Western countries and "leadership" is often the decisive factor. Although the independence of the central bank has often been questioned, the governor plays a pivotal role.
Second, Zhou Xiaochuan has been working as the central bank governor for nearly 12 years. Under the background of deepening financial reform, the replacement of the central bank leader is significant. Many people say Guo Shuqing is more ambitious in terms of reform based on the fact that in the year and a half he served as the Chairman of the CSRC by the end of 2011, he vigorously carried out reforms and intensively introduced new policies, which were widely praised by investors.
Third, the substitution of the central bank governor will bring about multi-level changes, which are expected to affect a number of policies. Specifically, the primary responsibility of the People's Bank of China is similar to the Federal Reserve, except for the responsibility for "elaboration of financial sector reform and the development of strategic planning." Then how did it perform in this respect over the past decade?
Next, monetary policy can be said to be the most controversial area, mainly in the over-excessive issuance of currency, high levels of inflation, and the long-term negative interest rate policy. In particular, negative interest rates, which mean the interest rates on bank deposits are below the rate of inflation, lead to a decrease in the size of people's bank deposits over the years. This is equal to providing a subsidy to the state-owned capital users with public wealth, thus it would not be an overstatement to say the policy is "stealing from the poor to benefit the rich."
Also, in terms of the regulation of financial institutions, the achievements are that large banks do not now have the massive bad debt-loads that they suffered before the joint-stock reform 10 years ago, and profits are now very lucrative. This means that the performance of the central bank seems quite good, but it has also caused an erosion of the wealth of the entire society by financial institutions. Large state-owned banks make profits in the hundreds of billions, which put many companies to shame. In fact, bank profits are not made by improving operational efficiency, but rather by relying on central bank policy support, which is extremely unfair for the real economy, and also distorts the configuration of production and social resources.
Undoubtedly, thanks to some of the wise policies introduced by the central bank, China's financial condition is more stable than many other countries. Meanwhile, among a number of policies which seriously favor bank-based financial institutions, the first duty of the central bank, the "elaboration of financial sector reform and the development of strategic planning," as mentioned above, means it is difficult to be fair and just. One can only imagine the results of financial reform conducted on this basis. The reforms would be utterly inadequate.
Furthermore, the central bank's monetary policy has been at the forefront in influencing China's capital markets. China has had the world's most impressive economic growth, but it also has one of the least impressive stock markets, which completely fails to follow the basic economic laws and offers a very low rate of return. These are the reasons why investors cheered when they heard about the change in the central bank governor.
It is well known that the People's Bank of China must report to the State Council on major policies. In most cases it is the executor rather than the maker of the central policies, so it does not have too much power, and many of the pros and cons of policies cannot be assessed in a short period of time. Therefore, I have no intention of evaluating the merits and demerits of Zhou Xiaochuan because his tenure carries a heavy historical responsibility.
Finally, the Chinese people have high emotional expectations for deepening reforms, as they know that only by reforming can opportunities be created and society gradually move towards fairness and justice, therefore the replacement of the central bank governor generates a lot of attention. Financial reform can be regarded as the core of economic reforms. If in the future the new governor can give up the interests of the banking sector, carry out radical reforms, and make corrections and adjustments to many of the existing policies, the substitution will have a far-reaching effect on the country's overall economic development in the future.
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