The next governor of the People’s Bank of China has a broader, more conceptual inbox than is typical of incoming central bankers.
Zhou Xiaochuan has held the post since 2002 and has hinted that retirement is coming. Zhou helped transform the bank from a fairly obscure bureaucratic outpost in the economic world to a place with a growing international profile that’s increasingly transparent — compared with when he arrived — even if it still has a great deal of work to do. The next leader will have to paint on a bigger canvas: What kind of central bank for a China-dominated world? President Xi Jinping hasn’t said who will come after Zhou, and the selection process is opaque. That’s okay, because the architectural issues at stake are more important than the person.
During Zhou’s time, China dropped its hard peg to the dollar, joined in a wave of global interest-rate cuts in 2008, and won reserve status for the yuan at the International Monetary Fund. It is now a stakeholder in the global system. That’s impressive, but not nearly enough.
In economic terms, China is closing in fast on America, projected to overtake it by 2030, yet its capital markets are still a minnow. This incongruity is symptomatic of what the next governor needs to address. China doesn’t have a central bank suited to world leadership. The next guy will have to craft one.
China’s economy has started shifting from one driven by exports and investment to one driven by consumption, services and technology. It has flaws: One can fairly argue that its recent stability after a slowdown has come at the cost of a debt binge that will have to be addressed. And while the firm peg to the dollar was ditched in 2005, a soft peg has taken
its place. The yuan isn’t remotely ready to challenge the dollar’s primacy.
The next governor needs to address these things, all while being mindful of the Communist Party’s overriding need for stability. Social stability won’t be there without financial stability. The PBOC isn’t independent like its major-economy peers, and it’s tough to envisage it becoming so.
But while Xi will make the big calls, there’s a significant role for the professional and managerial class to execute and develop policies to suit the president’s goals. And the central bank has plenty of such talented officials.
The governor is first among these equals. A governor that has, or earns, Xi’s trust might be given a lot of leeway. Because Xi has concentrated decision-making, he can’t do everything and be everywhere all the time.
Look for evolution, not revolution, on the way to refitting the PBOC to suit the needs of the world’s largest economy. Does it become more like the Federal Reserve, minus the independence? Or does it retain its essential nature as a stakeholder in a broader constellation of central banks?
It’s hard to see how the latter works if your economy is no longer in catch-up mode but has arrived. Leadership brings obligations. The PBOC’s old habits — statements issued in the dead of night, policy shifts during holidays in the West, key announcements just popped on the website at odd hours — will have to evolve for the coming era. The bank will need to get more comfortable explaining the way policy is decided, and offering a broader framework for how it sees the world. This could even be done while acknowledging the PBOC’s subordination to the Party and the president’s office.
Ultimately, the size of China’s economy will determine a lot. And as its capital markets grow to serve its needs, China’s central bank can only grow in importance.
Jerome Powell, the new Fed chairman, is inheriting an architecture well suited to the American century. Zhou’s successor will need to craft one for the next era.
Daniel Moss writes and edits articles on economics for Bloomberg View. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North Americ