Friday, July 8, 2016

Why China's Central Bank is not independent

Zhou Xiaochuan, the Governor of the People's Bank of China (PBoC) delivered the IMF's Michel Camdessus Central Banking Lecture on June 24, 2016. The annual lecture, initiated in 2014, is to highlight the Fund's commitment to collaboration with member countries' central banks and provides a forum to discuss topical issues in central banking.

Zhou spoke on Managing Multi-Objective Monetary Policy: From the Perspective of Transitioning Chinese Economy addressing the lack of independence of PBoC.

His main points were:

....if a central bank has multiple objectives, it may be harder to be immune from the political reality. The reason is that, on the one hand, multiple objectives require more coordination and joint efforts with other government agencies and regulators, and on the other hand, functions such as macro-prudential and financial regulation by themselves are sensitive mandates for central banks.

For central banks with a single objective, it is relatively easy to be independent. However, if a central bank has multiple objectives, it may be harder to be immune from the political reality.

...balance of payments largely affected the central bank’s monetary policy, money supply and price stability objective. Therefore, the PBoC must pay attention to balance of payments, and needs to assume accordingly roles such as managing the exchange rate, foreign exchange market, foreign exchange reserves, gold reserves, and balance of payments statistics. 

To put it in a nutshell, the PBoC has multiple objectives, which not only include such four annual objectives as ensuring price stability, boosting economic growth, promoting employment, and broadly maintaining balance of payments, but also cover two dynamic objectives, namely, financial reform and opening up, and financial market development. The choice of a multi-objective central bank has to do with China’s circumstances as a transition economy.

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