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September 2011

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Central bank governor of the year 2011: Zhou stays firm amid China’s challenges



Zhou Xiaochuan, the governor of the People’s Bank of China

About Zhou Xiaochuan

Press release

Also see
China Awards for Excellence 2011

More on China

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China’s excess FX reserve isn’t “optimal,” says PBC’s Zhou

Tradition has it that the head of the Federal Reserve is the most influential central banker in the world.

Ben Bernanke still is. But Zhou Xiaochuan, the governor of the People’s Bank of China, is beginning to run him close.

China’s role in the global economy is such that the world’s markets now hang on Zhou’s every word. Will he allow the renminbi to appreciate? Will he open up China’s currency to become a key global trading tool? What will he do with China’s more than $3 trillion of reserves? Will China continue to be the biggest owner of US treasuries, with latest estimates suggesting it holds a staggering $1.3 trillion of these securities?

And most important of all, can Zhou carry off the delicate balancing act of controlling China’s inflation rate and still maintain the kind of growth rates on which the economies of the developed world now so depend?

Zhou answered all of these questions and more in an exclusive interview with Clive Horwood:


What do you consider to be the most important decisions that you have made over the past 12 months? What impact did these decisions have?

Zhou Xiaochuan, the governor of the People’s Bank of ChinaBeginning from the second half of 2010, with the monetary policy stance shifting from "relatively easy" to "prudent" and with the introduction of macro-prudential policies, monetary conditions are returning to normal.

Since the outbreak of the global financial crisis, China has taken steps to further promote financial reform, based on lessons learned in the crisis. What makes China different from other countries is that we are in the transition from a planned to a market economy and need to undertake a large number of reform tasks. Therefore, our financial reform is necessitated by both the financial crisis and the transition.

In recent years, the People’s Bank of China has promoted financial reform in several key areas jointly with other agencies, such as the reform of state-owned commercial banks through recapitalization and the establishment of a modern corporate governance structure, the reform of the renminbi’s exchange rate regime, and the introduction of a macro-prudential policy framework. These are all very important reforms and have had a significant impact on development of the Chinese economy and financial system.

How are you balancing the need to maintain growth but contain inflationary pressures? Do you expect monetary tightening to continue?

Zhou Xiaochuan, the governor of the People’s Bank of ChinaAfter the outbreak of the financial crisis, a stimulus policy package had to be adopted promptly in China to mitigate the impact of the crisis, through the use of expansionary fiscal and monetary policies to restore market confidence, to stabilize economic growth, and to support recovery. Overly expansionary policies may be associated with inflationary pressure, but the priority at that time was to address the impact of the financial crisis.

The price hike that began in the second half of 2010 is related to the expansionary measures, and also to many other factors, such as excessive global liquidity, massive capital inflow, output fluctuation of domestic agricultural products, rising labour cost, and so on.

As the recovery was more and more solidly based, the PBC promptly shifted the focus of macroeconomic policies and took inflation control as our top priority. We will not adopt macroeconomic policies that might trigger a hard landing. Rather, PBC aims to achieve a soft landing by having the policies gradually produce their effect, and pays attention to preserving the stable and sustainable growth of the national economy. Having a medium-term inflation target of around 4% is aimed at achieving a balance between growth and inflation, and providing room for correcting price distortion and further marketization. Globalization and the continuing opening-up process have also made some sectors of the Chinese economy more susceptible to the international capital flow and commodity prices volatility.

Banks in China complained twice, around this Spring Festival and in July, of very tight liquidity conditions. How do you weight the need to preserve banking system liquidity against trying to control inflation?

Zhou Xiaochuan, the governor of the People’s Bank of ChinaSome people may feel that money is fairly tight, because they compare it with the crisis-response period in 2009 and 2010. In fact, money and credit growth are comparable to their normal pre-crisis levels. This, in my view, reflects the return of monetary policy from the unconventional, crisis response mode to its normal state.

Many economists see increasing the deposit rates up to above the inflation rate as the key to encouraging domestic consumption and curbing the speculative investments in commodities and real estate. Do you agree? What are the necessary conditions for a hike of the deposit rate in the near term?

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When BES collapsed earlier this year, markets briefly feared a return of the crisis to Portugal and to Europe. Even after the bank's bailout, investigators still pore over bank documents, transfers and deals, trying to make sense of Salgado’s last days battling to keep his empire afloat. The backstory is of an extraordinary decades-long rivalry between the country's two pre-eminent business families.