It has taken almost two decades of reform but the People’s Bank of China (PBOC) believes 1999 will at last see it join the ranks of the world’s independent central banks. The big revamp, long-awaited and finally announced towards the end of last year, involves replacing the bank’s provincial-level structures with nine regional entities which will answer only to Beijing.
The aim is to boost the central bank’s independence and eliminate interference by provincial and city governments through overhauling its management structure along the lines of the US Federal Reserve. Central bank governor Dai Xianglong said at the opening of the Shanghai regional branch: “This [change] will aid the central bank in exercising its authority over monetary policy and maintaining its independence in financial supervision.”
Beefing up the bank’s autonomy is a major reason for the revamp. The central bank has long suffered interference from the political muscle wielded by provincial authorities regardless of the central government’s repeated attempts since 1979 to free the national banking system from local politics. The bank’s local officials were often put under enormous pressure to deviate from Beijing’s policies and to provide funds for pet projects. Car manufacturing, for example, proliferates in China with production facilities in almost every province however uneconomic. Local leaders like having a supply of cars to draw upon for their own use.
Political meddling also made it difficult for central bank officials to expose financial corruption and incompetence. By setting up a tight network of regional branches that cut across provincial boundaries, the central bank is sending a message that it will no longer put up with local intrusion.
At the same time, appointments will be made directly from Beijing. Under the old system, the provinces named their own men to run the local branches and the authorities in Beijing simply rubber-stamped the appointments. PBOC managers in the provinces were supposed to act as central bankers in the provinces but were usually treated as part of the provincial or city administration. They were expected to attend its meetings where policies were spelled out which they were expected to implement. Now, the new regional branches will operate under the direct supervision of the head office and will be responsible for implementing Beijing’s policies.
The first major appointment made in the reshuffle reflected the authority’s concern that the new regional branches be taken seriously. Hand-picked for the job of president of the crucial Shanghai branch was Wu Xiaoling, the country’s top foreign-exchange regulator. She was the tough-minded head of the State Administration of Foreign Exchange who presided over the tightening of forex controls early in 1998 as China’s leadership became increasingly concerned that vast amounts of hard currency were being moved offshore. The Shanghai branch has authority over Shanghai itself and two important provinces (Zhejiang and Fujian) and is one of the most powerful arms of the revamped PBOC.
The new structure was welcomed by foreign bankers. Philippe Delhaise of the ratings agency Thomson Bankwatch in Hongkong described it as a positive move. He said: “The central bank will become a better regulator. In the old days, the branches did what they wanted to do and there was very little control over them. Now, they will have to do what they are told.”
The drive to give the PBOC real authority over China’s sprawling and nearly-anarchic financial institutions began with the late patriarch Deng Xiaoping’s modernization programme two decades ago. However, until last year, the central bank’s own modernization was undermined by three factors: fears within the politburo of giving away too much autonomy to the central bank; demands by the provincial authorities for local control over provincial banking; and uncertainty over which model was the most suitable for China. This last problem caused considerable delay.
A Chinese central banker closely involved with the PBOC’s moves to attain independence over the years and who has taken part in various government-backed studies of central banks abroad says: “You can compare our efforts to a man crossing the river when it is dark and feeling for stones on the way. We have to be slow and careful. We are not sure what is best for us. In fact, we had no idea on how to set up an independent central bank. That is why we made so many study trips to central banks in other countries. We wanted to learn from them.”
The PBOC was established in 1948. It was then both a central bank and a commercial bank. Under the socialist system, the bank was no more than a cashier’s window, whose job was to provide funds for state-approved projects. In 1983, its commercial activities were hived off and it concentrated on regulatory matters and monetary policies. But it still lacked independence from its political overlords and from local meddling. In 1989, a central bank delegation was sent to Germany to study the Deutsche Bundesbank to see how it operated and whether the PBOC could borrow from its structure. But the politburo, concerned that its control over the PBOC would be eroded, decided against adopting the highly-independent German model. The provinces, reluctant to give up their influence, also voiced objections.
In 1994, the government turned to the United States. Federal Reserve chairman Alan Greenspan visited China and discussed the US system with Zhu Rongji, who was then vice-premier in charge of the economy and head of the central bank. He liked the US model. In 1995, legislation was passed which defined the PBOC’s authority on monetary policy. But the Chinese central bank still kept its archaic and interference-prone structure. With the economy overheating and the inflation rate high, the authorities felt the time was not ripe for major changes. Now, with the country facing deflation, an overhaul seems appropriate.Pauline Loong
